Depressed Market Prompts Variety of Financing Methods
The depressed Southeast Los Angeles County real estate business has prompted many real estate agents to improvise deals that never would have been necessary in the hot real estate market of 18 months ago. Such creative financing is gaining increasing popularity among brokers and lenders who know the methods. These include:
* Residential Trades: One property owner swaps with another. Little or no money changes hands. Brokers typically earn a commission based on the market value of the properties involved. “People have made trades for years involving investment properties,” said Mary Margaret Tate, a Long Beach real estate agent with experience in such transactions. For instance, “you match a buyer up with a seller who’s getting divorced and needs a smaller house, or a seller who’s financially strapped and needs a smaller payment.”
* Lease Options: The buyer makes an offer on a home, sometimes paying a fee that reserves an option to buy. In the meantime, the buyer rents the property and a portion of the rent accrues toward a down payment for the purchase. This allows the buyer to lock in a price on property he would not have been able to afford for several months.
* Equity Share: The buyer agrees to share the equity in a property with another party, sometimes a family member, sometimes an investor. In return, the second party provides all or part of the down payment money.
* Seller Second: The seller agrees to carry a second mortgage on a home being sold. This lowers the amount the buyer has to borrow from a lending institution. As a result, the buyer can qualify for a loan more easily, sometimes with more favorable terms. The buyer will then typically make monthly mortgage payments to both the lending institution and the seller.
* Interim Second: This method allows someone to buy a new home before selling an old one, said Covina loan officer Tom Botana. It is invaluable when the home buyer needs the equity from his old house to purchase a new one. The homeowner acquires the new house with both a first and second mortgage. The second mortgage is actually a line of credit based on the old property’s equity. When the old property finally sells, the second mortgage can be paid off.
* Seller-Assisted Financing: The seller pays points, or loan fees, on the buyer’s loan. Paying fees that the buyer could not have afforded often allows the buyer to get better loan terms.
* Seller Perks: The seller agrees, for example, to pay fix-up costs on a home after the purchase. Some sellers offer less practical perks, such as plane tickets to Hawaii.
Creative financing is nothing new. Much of the creative financing of yesteryear has become standard practice today.
In the early part of the century, long-term amortized loans, which involve paying off a debt over many years, came into widespread use when land threatened to become something only the rich could afford, said Bob Prigmore, a Bellflower realtor with 36 years of experience.
The high interest rates of the late 1970s and early ‘80s led to another now-standard innovation--adjustable-rate mortgages. These mortgages are tied to the marketplace and can come down when other interest rates do.
These days, Prigmore said, “we’ve reached a point where affordability is the most important thing of all. We’ve got to do something about it.”
