Monday, March 16, 2015

Seller Financing on High End Homes

Six out of thirteen recent sales of Lake Sammamish waterfront were purchased with cash. The other seven were purchased using conventional financing. In the cases of conventional financing, the borrower would have had to use a "jumbo" loan.

A jumbo home loan (or jumbo mortgage) is a mortgage loan that exceeds the conventional conforming loan limit. The conforming loan limit is set by Fannie Mae and Freddie Mac and in Washington, the current conforming loan limit is $417,000. It is not unusual for a jumbo loan to provide up to $3 million to qualified homebuyers. The benefits of a jumbo loan include the following:
  • Purchases up to 90% LTV
  • Rate & Terms 90% LTV
  • FICO’s down to 660
  • Fixed, ARM, and interest only ARMs available
  • First time homebuyers are permitted
  • Max LTV on Cash Out is 75%
  • Loan amounts up to $3M on single family primary residence in most states
If the median home price for a waterfront home on Lake Sammamish is $2.7 million, then a borrower would have to come up with at least $270,000 cash plus closing costs to purchase a home using a jumbo loan.

Suppose a potential borrower only had $150,000 right now, until their tax refund, until the sale of their current house, until their divorce settlement is final, until cashing out when the stock market is up, or any number of other reasons why a high income borrower may not have all the cash necessary for a purchase of this size. What is a Seller to do?

If the goal is to maximize the number of qualified buyers looking to purchase their waterfront property for maximum dollar value, a Seller might consider offering seller financing. But very few do, probably because their real estate agents never ask about it or don't understand it.

I am always surprised in my own search for free and clear property, that listing brokers have not even had the discussion with their Seller clients about the possibility of seller financing. It is a little-used tool to maximize profits on the sale of a property.

In our example above, suppose the Seller were to offer $120,000 in seller financing to help his purchaser in buying his waterfront property. The Seller is likely to attract more buyers, now willing to pay a higher price because they can get the financing they need. So the Seller is likely to get a higher price for his house.

In addition, the Seller can set the terms of the promissory note with the Buyer borrower. He can charge a higher interest rate for a second mortgage. He can require cash-out in a year, two years, or however long he is willing to hold the financing. So the Seller now earns more interest on top of receiving a higher price for his house.

So why not? It is a tool that every listing broker ought to be discussing with their Seller clients if they are serious about getting the best price for the house.

Happy Investing!

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