Where Profit Was Once Made in the Price, During This Cycle it Will be Made in the Terms

Topics: Negotiating

Although buyers are most concerned with down payment and monthly payment when they buy, almost every seller is more acutely tuned to the price offered for a house when the transactions boils down to the buyer getting a new loan and paying cash.  Both of them should be more concerned with the loan terms.

Ask any banker; the terms of the financing can provide a lot more profit than the profit in a house sale.  For every $100,000 in a level payment, 8% fixed rate, thirty-year loan, almost $300,000 will be paid in over the full term of the loan before it is paid off.  That should tempt everyone to take a hard look at the way property is bought and sold.

In general, as a seller who is going to use sale proceeds to buy another house, the higher the price and the shorter the loan term, the better.  As a buyer who is going to hold on to a house for several years, the lower the payment and interest rate the better.  It is from these opposing points of view that creative financing can be used to transfer value between buyer and seller that is greater or less than price alone.  For instance, anytime a buyer can get a zero interest long term loan from a seller for his or her equity and take title subject to existing financing, all the payments that would have gone to the seller to pay interest will be paying principal, so the seller will be losing out.  The longer the loan payback period, the more the buyer will save.

On the other hand, a home-seller can increase the price, and shorten the loan term and wind up with an equivalent amount of money that could be tax free so long as the total profit doesn’t exceed $500,000 per couple.  By offering zero interest financing and adjusting the price, loan term, and down payment a seller might attract buyers who would otherwise pass him or her by.

Both buyer and seller can use a “wrap-around” Note secured by either a mortgage or an All Inclusive Deed of Trust to create an even greater transfer of profit and equity in a deal.  If a 6% $100,000 loan were wrapped with a $150,000 Zero Interest Note payable at $1000 per month, the original borrower would collect $12,000 in annual payments and pay out $6000 in interest on the underlying Note.  The buyer would be paying down his loan in 150 months, so the house would be paid off in full in a little over 12 years. 

Rather than offering 6% interest-only financing for five years, one builder I saw was offering zero interest rate financing to anybody who could pay off his loan in 5 years.  This attracted a lot of business and didn’t really cost him that much because he was being repaid so fast.  If $100,000 would ordinarily earn $6000 per year in interest, if the Note were a single payment Note due in five years, he’d be more or less discounting his price by $30,000 ($6,000 X 5). 

Now, suppose, in order to get zero interest terms, 20% had to be paid down, with an additional 16% paid at the start of each following year; the first year he would have been paid $36,000.  If he’d sold on interest-only terms, he’d have only been paid $6000.  In the following four years, he’d get another $64,000 rather than $24,000 in interest-only payments.

Whether this would be a smart move would revolve around what he’d do with the payments he received.  If he used it to pay down a high interest rate loan, the interest he saved on it might more than make up the interest he’d have gained with conventional seller carry back financing. 

When you approach financing with an open and creative mind, you can structure a lot of financing schemes that can be beneficial to both buyer and seller.  It behooves you to learn all you can about creative financing.  I hope my crewealth.com website will help.

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