How to Sell Your Home Now! (by Kevin)
In today's residential housing market many people are still experiencing challenges when selling their home. First, although interest rates are down, banks are still very tight with their money and who they are lending to. So many people who want to buy can't secure a loan from a bank. Second, there are still a great many homes where the owner owes more on their loan than the house will sell for in their market or the house needs repairs to qualify for a loan and the owner doesn't have the funds to repair the home. Third, some home owners need to sell their home fast due to job changes or other life events. Homeowners with these types of issues have several options to sell their home.
Selling Retail: Most people only know the retail method. They list with a real estate company and the home goes up on the market. One benefit is the house will get a lot of exposure and this is a great way to sell if the home is in good condition and will pass inspection. However, due to lots of competition the home must also show well. Another drawback of this method is that a retail sale generally takes at least 3 months and in some markets a lot longer. The benefit of this method is once the home is sold the owner is done with it.
But suppose the home owner doesn't have a lot of equity in the house. For instance, take a house worth $155,000 where the home owner owes $150,000 and the house sells for the full retail value of $155,000. Typical closing costs to sell a home run around 10 - 11%. In this case 6% ($9,300) for sales commissions to the real estate agents, 3% ($4,650) closing costs, and let's be very optimistic with 2% ($3,100) for buyer concessions (where the seller pays some of the buyer's closing costs.) So here is what this retail transaction would look like at closing.
$155,000 sales price
-$150,000 to pay off the existing mortgage
-$ 9,300 sales commissions
-$ 4,650 seller closing costs
-$ 3,100 seller paid buyer concessions
-$ 12,050
Since the end figure is a negative the seller would need to bring this money to the closing table. Bummer!
In this example we have not included costs for any repairs the inspector may find or costs to prepare the property for retail sale, such as painting, staging, etc.
Suppose this same home would only retail for $140,000, the seller owes more than it is worth. Then the seller will need to bring even more money to the closing table.
Cash Buyer: It is extremely rare that a home owner will run into a cash buyer willing to pay a retail price for their home, but if they do, they can save money on closing costs etc. However, cash buyers are generally investors like us. We never pay retail for a house. We will generally calculate what a house is worth once it is fixed up which is called the After Repair Value, calculate 65% of that figure so we can make some money after holding and closing costs, and subtract out costs of any repairs. This would be our maximum allowable offer for the property.
This may be the best option when the homeowner has a lot of equity in the house so they can afford to accept less to complete a quick sale and/or the home needs a lot of repairs and the home owner doesn't have the funds to fix the house to qualify for a bank loan.
Short Sale: A short sale is when the bank agrees to take less for the house than they are owed. In this case, the home owner will not have to bring money to the table, but there are some serious things to consider. First, in our experience short sales take a LONG time. We worked on one where it took over a year and the seller finally just lost heart with the process. Second, banks will often not even consider a short sale unless the home owner is behind in their payments. This will have a negative impact on the homeowner's credit rating. Third, since the homeowner clears themselves from the debt obligation (the mortgage or mortgages) for less than what was owed, the lenders can claim the homeowner received the amount of the unpaid debt as implied income. Therefore the homeowner could be required to pay taxes on the difference between what was owed and what the lenders actually received.
A sad statistic is that more than half of all attempted short sales still end up in foreclosure and much of this is caused by the inefficiency of banks. See our article "Banks are Crazy" below.
Foreclosure: In today's market a lot of people have just stopped paying on their mortgages. Some have even just walked away from the home. These people think that by, in effect giving their home back to the bank, that is the end of it. Nothing could be farther from the truth.
First of all, to reach a foreclosure status the owners credit rating will be damaged due to all the late payments. These will stay on their credit report for a least two years. Second, a foreclosure will stay on the credit report for even longer. We've been told that a foreclosure on a credit report is worse than a bankruptcy on a credit report. Third, once the bank takes back the house and then sells it, the owner can still be held liable for the difference between the selling price and what was owed including all associated costs of the foreclosure. Like a short sale, this could result in unpaid debt showing up as implied taxable income to the homeowner or worse yet a judgment where the lenders can come after other assets, including wages, to recover their loss.
Rent it out: While not technically a sale, turning the property into a rental is moving it to an investment category rather than an owner occupied home. Renting a property can be a good way to get someone else to pay the mortgage, or part of the mortgage. We investors do this all the time. Renting allows the homeowner to move to a new job or home quickly without bringing money to the closing table. However, the homeowner is still responsible for all repairs, and thus has to deal with what we call "tenants and toilets". You can mitigate the stress of being a landlord by hiring a property management company to take care of the property for a fee, usually 10% of the monthly rent collected. They will deal with the tenants and the toilets but the homeowner is still responsible for the cost of all repairs.
Where we live the rental income will not cover the mortgage costs of many of the homes here; therefore, the homeowner is still required to pay some of the mortgage costs each month. Furthermore, with rentals if a tenant moves once a year you will generally experience at least one month where the house is empty, (think no income) before another tenant moves in. If you choose this option read a good book on how to find and keep good tenants and/or good management companies.
Sell it but keep the loans in place: In today's market the existing loans can be as valuable to a buyer as the house. By keeping the loan in place a buyer just comes in and starts making the payments. The buyer promises to make the payments, they do not assume responsibility for the mortgage even though the house is actually sold. If done right, with all the proper paperwork, the seller has all the recourse rights any lender would have if the buyer defaults on making the payments.
Some people might say this is illegal, but they would be wrong. There is even a line on the standard Federal HUD-1 closing summary sheet to account for existing loans.
In our practice Mary Jane and I are associated with a firm that specializes in these types of transactions. That firm will actually purchase the house and take responsibility for making the payments on the loan or loans. We then find another buyer who will buy the house from us and they make payments to us. These transactions are all legal, all documented, and all above board including notifications to the original seller's bank(s). The bank can take exception with this agreement but after more than 1,000 of these transactions that has never happened.
This is really a great option for people who want or need to sell fast, have little or no equity, or can't afford to fix up their home. Closing costs are low because there are no commissions to pay. It works for those with equity in the home or owing a little more than the house is worth.
There are some risks associated with this type of sale for the homeowner. The primary drawback is that the homeowner remains liable for the underlying mortgage(s) until they are paid off. There may also be some difficulty in qualifying for a new loan because the old loan(s) stay on their credit report and count as debt. This last item is mitigated because the new Dodd/Frank law limits the amount of time a lender may consider these loans to one year if all payments have been made on time.
While the home owner remains liable for the loan, they have all the rights of any lender and can foreclose if payments are not made. However, in our model, an additional benefit is that a multimillion dollar firm has purchased the house and agreed to be responsible for making the payments. In addition, once we resell it, there will be another party who is responsible for making the payments. So the home seller has two layers of protection.
Now let us compare this last option to the other options.
Compared to renting out your home this option is so much better because there are no toilets of tenants to deal with. The house is sold, and no one takes better care of the home than the home owner themselves.
It is better than a foreclosure or short sale because the home owner's credit rating will be maintained and there is no implied income with the associated tax liability.
It is better than an all cash sale because the home owner can receive more for their house.
It is better than a retail sale with little or no equity because the home owner may not need to fix anything or bring money to the closing table.
It is also a great option for those wanting to sell quickly because this can often be accomplished in a matter of weeks rather than months.
The bottom line is this: the more you know about how to sell a property the better off you will be. Call us if you want to know more or know someone who needs this type of solution.
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