Arn Cenedella

Home sellers use this approach to sell your home !

Like most things in life, what was in vogue many years ago comes back into vogue after many years of being dormant. This applies to clothes, music and real estate !

For the past 6 or 7 years, interest rates have been so attractive, what used to be called “creative financing” has had little play in the recent market.

Now that the market has slowed down, some of these “creative” techniques are coming back.

Owners are now helping the buyers finance the purchase by carrying back a note as part of the purchase price. This could be a first loan or even a second loan.

There is another way, home sellers can help buyers obtain financing without the need to carry paper.

By buying down the buyers’ interest rate, the home seller can still obtain all cash for his property and keep the sales price up while bringing the buyers’ monthly payment down. It does cost a home seller money to buy down the buyers’ loan rate, but as I will show below; the cost of the interest rate buy down to the home seller is less than the price reduction required to bring to buyers’ monthly payments down to the same level.

Let’s look at a $750,000 purchase with 20% down ($150,000) for a $600,000 loan.

A typical 30 year fixed rate loan at 0 points might be 6.125%.

The loan payment would be $3,646.

If the home seller would pay 1 point towards the buyer loan, the rate would be reduced to 5.625% and the monthly payment would be $3,454.

1 point would cost the home seller 1% of $600,000 or $6,000 so effective sales price would be $744,000.

If the home seller was to just reduce the price to $744,000 and the buyer got an 80% loan with no rate buy down, his payment for 80% loan of $3,616 – which is a $30 reduction in the buyer monthly payment – whereas with the 1% buy down, the buyers’ monthly payment is reduced $192.

What price could a buyer pay for the house without a buydown and keep his monthly payment at the buy down payment of $3,454?

At 6.125%, $3,454 would borrow $568,456 and with the same $150,000 down, a buyer could buy a house for $718,456.

With this example….one can see….a home seller can pay $6,000 towards the buyers’ interest rate – generating a net sales price of $744,000 while the buyer will have a payment on a $744,000 house equivalent to a home purchase of $718,456 without the buy down.

Effectively the seller is able to obtain $25,544 ($744,000 less $718,456) more for his house while making his home more affordable for the buyer. This creates a win win situation for both the home seller and home buyer.

Please let me know if you have further questions.

You may also contact Linda Lunsman at Princeton Capital for more specifics.

This entry was posted on Wednesday, November 26th, 2008 at 12:31 pm and is filed under Credit Information, Real Estate, Real Estate Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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