An ideal time for buyers to enter the market is when prices are still falling and optimism is at an all time low. Sellers are motivated to sell before their equities drop even more. Nightly Business Report estimates $9 Trillion is sitting on the sidelines waiting for clear signs that the bottom has been reached and prices are going to rise. Once that happens, buyers will rush back into the market, driving prices back up. Ultimately, because they are unwilling to buy into a falling market, they wind up paying more and making less profit than those who do.
It takes a lot of courage for a person to buy a house and watch the equity shrink for a time until the market begins to recover, but that’s the only way to beat the rush once prices start back up. Furthermore, a lot of cash as well as cash flow can be tied up for an indefinite period until sales resume and a profit can be realized. The solution is to tie up a property and to freeze the price now, but avoid closing on the purchase until a later period when the bottom has passed, or the market is close to it. There are a number of ways to do this that on the surface may not appear to be Options, but their effect is the same; to delay the transfer of much money until a later period when values and timing can be more accurately calculated. Here are some of the ways this can be done today:
Short Sale Offers: with almost half of house sales in distressed areas being submitted to lenders as Short Sales, a lot of time transpires between the date of the contract offer, and the approval by the lender. Added to this time can be the closing of necessary buyer loans. It has been my experience that lenders who approve a specific Short Sale offer aren’t very sensitive to having a third party actually close on the property at that price. They understand that a homebuyer has very limited patience when it comes to being able to buy and move into a new house. Buyers often walk away right in the middle of the Short Sale approval process. If, in the interim, the house price sinks below the offered price, a new offer could be made, or the offer simply abandoned with no penalty. The advantage is to the buyer.
HUD REO Bids: HUD usually accepts of rejects an email bid fairly quickly, but won’t close if the identity of the end-buyer differs from that of the identity of the Bidder. Once a bid is accepted, they usually give you 48 hours to send in a couple thousand dollars, but ordinarily extend the settlement date for 60 days, if not longer. If the bidder has the cash with which to close, he can resell the property without any penalty. But if he doesn’t, the delay gives him a reasonable time to find a buyer who can raise the needed cash; but there’s a hitch: If you expect to resell the property in order to raise the cash needed to close on it, you need to bid in the name of a fresh new Trust, LLC, or Corporation. Then, instead of transferring title to the end-buyer, simply transfer ownership of the entity.
Contingent Contracts: One fellow I know is buying lots of houses on contracts that have contingences that must be cleared before settlement can take place. These run the gamut from obtaining financing with specific terms, to clearing title exception, to getting a variety of inspections performed. These might include testing for Lead Based Paint, Asbestos, Mold, Expanding Soil, Termites, and insuring the structure, roof, wiring, and plumbing are up to code. The more contingencies, the less likely the buyer is to sign the contract. When the Purchaser agrees to either pay for the inspections, or to waive them, that softens their impact. An all purpose phrase is: “This Agreement is not final until the conditions of title, financing, and condition of the physical premises has been inspected and approved by the buyer.”
Full Liquidated Damages: Most standard form Purchase and Sale Agreements carry a statement that more or less says that if the buyer fails to perform, that all money deposited to bind the contract will be forfeited as “partial liquidated damages.” This leaves the door wide open for additional damages. If the word “partial” is replaced with “full”, then the buyer will lose his token deposit, but nothing more.
