In Part 1 of The Easy Way to Get Low Down, Low Interest Loans, I explained that there are many homes today that have little or no equity that are subject to low interest loans that can be assumed, and offered the opinion that the risk of a Lender invoking the “Due on Sale” clause is very low. In Part 2, I discussed the use of “0 Balance Wrap Arounds” to reduce risk to Sellers and provided a link to a full disclosure form to reduce risk to Real Estate Licensees.
In this part, I will discuss why it may make sense to buy such homes even if they have negative equity. As I have previously discussed, Buyers often make the mistake of concentrating only on price, when the financing terms can may be more important than price. For example see the discussion of the Price/Interest Dilemma.
It is also important to recognize that with an assumption it is not necessary to pay all of the costs involved in acquiring a new loan and it is often possible to assume the loan without reimbursing the Seller for tax and insurance reserves. Since these two items will typically add 3 to 5% to the total purchase cost, a higher nominal purchase price is warranted. In addition, it is often possible that a motivated Seller with negative equity will include appliances, drapes, blinds and furniture that would normally involve an extra cost in a typical transaction with new financing.
For a Buyer with weak credit or who otherwise doesn’t qualify for a new loan, paying more for a property and assuming a loan greater than the appraised value is often a better choice than continuing to rent. As mentioned in an earlier post, I once paid $15,000 more than Market Value to acquire a property I wanted because I did not qualify for financing. It is also important to recognize that an appraiser is estimating Market Value and that a component of the definition of Market Value is:
“The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
Therefore if a typical sale involves a 10% down payment and a Buyer paying loan fees and funding reserves, those terms would represent Market Value, and making a lower down payment without paying loan fees or reserves justifies a price greater than Market Value.
While the above scenarios may be attractive to Buyers, they will have little interest to Real Estate Licensees because there is no money to pay a commission. In such cases, the Buyer could pay a commission which could be in cash, exchange of other assets owned by the Buyer or a Note from the Buyer. Or a motivated Seller, needing to relocate and desiring to preserve credit rating to allow a purchase in a new location, may also be willing to add cash, trade other assets or give a commission Note.
The important concept is that creative Buyers, Sellers and Real Estate Licensees who are willing to think Outside of the Box, can make real estate transactions that more conventional thinkers consider impossible!