Advice For Condo Sellers:Seller Financing May Be The Way To Go!
Because of all the easy-to-get mortgages that were available in the last few years, we kind of forgot about a tried and true form of real estate financing -- Seller Financing.
I am predicting a return to seller financing in the coming years, especially for condominiums in Florida.
Under the new Fannie and Freddie rules, a condo in Florida now requires a down payment of 30 percent. This, I am told, is because in Fannie and Freddie's view, condominium values in Florida continue to fall due to overbuilding and lack of demand. So, they want buyers to put more down to help offset the possible losses. I think they also want buyers to have more skin in the game, so to speak.
It does not matter if you agree with this or not. That's how it is.
If you are selling a condo, that 30% down stroke can be a real difficult thing for prospective buyers to come up with. Let's take a condo valued at $150,000. To buy it now requires a down payment of $45,000 in cash at closing. A $100,000 unit will require a $30,000 down payment.
For most people, coming up with the down payment is now a very big hurdle to be overcome when purchasing a condo. I think down payment requirements are now one of the main reasons why condo sales are so slow throughout most of Florida, and I don't see any improvement until Fannie and Freddie change the policy.
So, how do we overcome this challenge?
There are two ways. The first is to have the buyer get an FHA loan where the down payment will only be 3-1/2%. Problem is, in order to qualify for an FHA mortgage, the entire condominium community must be approved by FHA, not just the individual condominium (another new rule). Community approval is a time consuming and often troublesome undertaking for most condo Boards of Directors -- I know; I just went through it with my condo community last spring. It was a pain!
That leaves us another alternative -- Seller Financing. With seller financing, the seller of the property actually provides the financing for the buyer. Think of it as a private mortgage.
With seller financing, the Fannie and Freddie rules don't apply. Instead of requiring a 30% down payment, the seller sets the amount of the down payment. I suggest that you require enough of a down payment to cover your closing costs and real estate commissions so you don't have to bring your checkbook to the closing. Usually, a down payment from the buyer of 12 to 15% will cover the costs. Remember, a 15% down payment is HALF the conventional amount required by Fannie and Freddie. Right away your property starts looking very attractive to most buyers.
Next, I suggest you amortize the payments as if it was a 30 year mortgage. Since the seller is assuming the risk of the mortgage, it is common to set an interest rate that is a bit higher than what a bank would charge for a mortgage. In today's market, an interest rate of about 7% is probably about right, but you might have to negotiate this a little with your buyer so he's comfortable with the monthly payments.
Finally, the agreement for seller financing will likely have a balloon payment at the end of 5 years. This means that the balance due on the property is due to you in full at the end of 60 months. This also gives the new buyer a 5-year period to arrange permanent mortgage financing with a bank or some other financial institution. So, it's a win-win situation for both buyer and seller.
Now, here's the downside. You have in your current mortgage a clause called a "Due On Sale" clause. Some mortgages call it a "Due On Sale Provision". Same thing. This means that when you sell your condo, the outstanding amount of your mortgage is due to your mortgage holder. So, if you are going to offer seller financing, make sure the amount you owe to your mortgage company is something you can easily pay to them when you complete your seller financing sale. Or -- and this is probably the best way to handle it -- pay off your mortgage totally before you complete the seller financing sale with the new buyer.
One final thing, and it's no biggie. As the seller, you will have to do your own credit check on the new buyer. Your real estate agent most likely will not do it for you. Real simple reason. Most agents don't want the responsibility. Real estate firms are not credit reporting agencies, and don't want to be. In this day of internet info, you can run a credit evaluation on somebody pretty quickly. If not, go talk to a loan officer at your bank and see if they can be of assistance. Or a car dealer.
Any experienced real estate agent, title company or attorney can help you arrange seller financing. If you've got a condo to sell in Florida, this might be the answer you've been looking for -- and it's the kind of creative thinking you may need in today's real estate world.
Happy Selling!
-30-
I am predicting a return to seller financing in the coming years, especially for condominiums in Florida.
Under the new Fannie and Freddie rules, a condo in Florida now requires a down payment of 30 percent. This, I am told, is because in Fannie and Freddie's view, condominium values in Florida continue to fall due to overbuilding and lack of demand. So, they want buyers to put more down to help offset the possible losses. I think they also want buyers to have more skin in the game, so to speak.
It does not matter if you agree with this or not. That's how it is.
If you are selling a condo, that 30% down stroke can be a real difficult thing for prospective buyers to come up with. Let's take a condo valued at $150,000. To buy it now requires a down payment of $45,000 in cash at closing. A $100,000 unit will require a $30,000 down payment.
For most people, coming up with the down payment is now a very big hurdle to be overcome when purchasing a condo. I think down payment requirements are now one of the main reasons why condo sales are so slow throughout most of Florida, and I don't see any improvement until Fannie and Freddie change the policy.
So, how do we overcome this challenge?
There are two ways. The first is to have the buyer get an FHA loan where the down payment will only be 3-1/2%. Problem is, in order to qualify for an FHA mortgage, the entire condominium community must be approved by FHA, not just the individual condominium (another new rule). Community approval is a time consuming and often troublesome undertaking for most condo Boards of Directors -- I know; I just went through it with my condo community last spring. It was a pain!
That leaves us another alternative -- Seller Financing. With seller financing, the seller of the property actually provides the financing for the buyer. Think of it as a private mortgage.
With seller financing, the Fannie and Freddie rules don't apply. Instead of requiring a 30% down payment, the seller sets the amount of the down payment. I suggest that you require enough of a down payment to cover your closing costs and real estate commissions so you don't have to bring your checkbook to the closing. Usually, a down payment from the buyer of 12 to 15% will cover the costs. Remember, a 15% down payment is HALF the conventional amount required by Fannie and Freddie. Right away your property starts looking very attractive to most buyers.
Next, I suggest you amortize the payments as if it was a 30 year mortgage. Since the seller is assuming the risk of the mortgage, it is common to set an interest rate that is a bit higher than what a bank would charge for a mortgage. In today's market, an interest rate of about 7% is probably about right, but you might have to negotiate this a little with your buyer so he's comfortable with the monthly payments.
Finally, the agreement for seller financing will likely have a balloon payment at the end of 5 years. This means that the balance due on the property is due to you in full at the end of 60 months. This also gives the new buyer a 5-year period to arrange permanent mortgage financing with a bank or some other financial institution. So, it's a win-win situation for both buyer and seller.
Now, here's the downside. You have in your current mortgage a clause called a "Due On Sale" clause. Some mortgages call it a "Due On Sale Provision". Same thing. This means that when you sell your condo, the outstanding amount of your mortgage is due to your mortgage holder. So, if you are going to offer seller financing, make sure the amount you owe to your mortgage company is something you can easily pay to them when you complete your seller financing sale. Or -- and this is probably the best way to handle it -- pay off your mortgage totally before you complete the seller financing sale with the new buyer.
One final thing, and it's no biggie. As the seller, you will have to do your own credit check on the new buyer. Your real estate agent most likely will not do it for you. Real simple reason. Most agents don't want the responsibility. Real estate firms are not credit reporting agencies, and don't want to be. In this day of internet info, you can run a credit evaluation on somebody pretty quickly. If not, go talk to a loan officer at your bank and see if they can be of assistance. Or a car dealer.
Any experienced real estate agent, title company or attorney can help you arrange seller financing. If you've got a condo to sell in Florida, this might be the answer you've been looking for -- and it's the kind of creative thinking you may need in today's real estate world.
Happy Selling!
-30-
posted by Terry Ward at 8:17 AM
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