In spite of losses incurred because of sub-prime loan defaults, lenders will lend money to owner occupants with reasonable FICO scores who can qualify for a loan. The problem is that today, all those cushy 80/20 and 80/10/10 loans with convenient terms have dried up, so buyers will need to come up with significant down payments in order to buy better homes.
When this same condition occurred in the early 1980s, investors, speculators, and occupants who wanted to buy homes put their heads together and came up with a form of equity-sharing that the banks approved of:
The entrepreneurs would first find a suitable target house that could be bought “right”. By definition, that was almost always a house in the upper third of price range where the market had stalled and where he could negotiate a price that would virtually guarantee a profit when the market rebounded.
The house was often a new house bought from a distressed builder or lender that would attractive a motivated occupant. As you’ll see, this isn’t the ordinary type of tenant.
After tying up the house on a recorded contract with a long escrow, the entrepreneur located a long term passive investor who would be willing come up with a down payment in return for a share of the profit. The key here was that there would be no contact with the property or the occupant; so this could be an out of area investor.
Lastly, he’d find a qualified occupant with a high FICO score who would be willing to forego any up-side profit in return for down payment assistance and affordable payments on a house that would offer a better lifestyle for his family for the next three to five years. At the end of that time, the house would be sold and his loan paid off. The only profit that the occupant would garner would be to be able to live in a champaign house on a beer pocketbook for a few years.
A purchase Option was sold to the investor for enough to pay the closing costs and a large enough down payment to leave a loan balance that they occupant could afford to pay. The investor then assigned one half interest in this Option to the entrepreneur who had put the deal together.
When the house finally was re-sold as agreed by the occupant, at the close of escrow, the occupant got all his principal payments and any money spent on pre-approved capital improvements returned. All it cost him to live in a nice house taxes, insurance, maintenance, and deductible interest
The investor and entrepreneur divided up the balance of the profit as capital gains on their Option received at the close of escrow. Today, this Option could have been exchanged for other real estate tax-free long before the occupant re-sold the house, so all the profit could have been tax-free if desired.
Incidentally, this isn’t just a fanciful idea; a syndicate bought hundreds of houses this way between 1981 and 1982.
