“Will the seller take 5% down?” the agent asked me. “FHA is the only possible thing out there right now for my first time home buyer, but if your seller can match it, then we should be able to write an offer.” This kind of conversation will become increasingly common as the credit crisis plays out and buyers and sellers look for other ways of putting and keeping real estate transactions together.
Go read this article by CNN Money regarding Fannie and Freddie:
“Fannie Mae and Freddie Mac are government sponsored entities that help the mortgage market function by purchasing pools of loans and packaging them into securities.
Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well.
According to a report from Lehman Brothers analyst Bruce Harting, it would be “extremely challenging” for either company to come up with so much cash to meet new minimum capital requirements, causing already timid investors to be concerned. He added that a “severely undercapitalized” Fannie and Freddie “could possibly topple the already fragile markets.”
A study by Bridgewater Associates, one of the world’s biggest hedge funds, estimates that total credit crisis losses will amount to $1.6 trillion worldwide, and we’ve only lost $400 billion so far . . . so the global financial crisis might only be 25% complete? Wowee . . .
“Yes, we’re ready to consider a 5% down,” I answered, “but we’ll have to structure the transaction in a way that adds some extra protection for the seller.”
In the standard seller carry back world, a 10% down payment is considered minimum, with 20% or more being preferable. If a buyer puts down that much hard equity, then it’s considered a pretty good note, and a note buyer will offer a higher price for it. Anything less than 10% and you seriously compromise the value of the note, or your ability to sell it at all.
So why would any seller consider taking a 5% down payment? Because:
- that may be the only way to sell without a drastic price reduction
- the seller needs out from under their mortgage payment
- we can close quickly
- there are more potential buyers if there is a low down payment requirement and there are no loan origination fees
- we can structure this deal using a land trust so that the underlying financing can stay in place without risking a “due on sale” violation, and upon any default, the seller can regain possession of the property in 60 days rather than the 120+ it would take if foreclosure were necessary. This reduces the risk of accepting a low down payment.
If we can’t count on the institutional lending community while they work out their issues, secure government bailouts, etc., then buyers, sellers and the real estate professionals who serve them need to become proficient at other ways of closing real estate transactions.
- If you’re a seller wondering if you are able to offer seller financing on your property, email me
- To talk about buying a home without bank qualifying, call me!