Alternative Ways to Buy Property
There is no question about it, the market has been troublesome for the past several years. As a result, there are many former homeowners out there who have either lost their homes or been forced in to a Short Sale situation by the continuing drop in their home values. Many of those same people are now back on solid footing financially and would like to be homeowners again, but are now faced with the reality that they have trashed their credit and will be unable to buy by conventional means for a long time to come.
So what can they do? Well, they could simply face that fact that they are going to be renting for several years, or perhaps seek alternaive means to buy property.
What is Creative Financing?
Creative Financing is available to Sellers who do not have an outstanding note against their property. With a property that is free and clear, the seller can "Carry-Back" a note (in other words be the bank) and capture a good portion of their equity in the form of cash from the buyer. "Carry-back" situations do require a significant amount of cash from the buyer on the front side of the transaction and then the buyer is obligated to make payments monthly just as they would with a regular lender. The difference is that the money goes directly to the seller through a Servicing Agency, rather than a bank.
Most "Seller Carry-back" situations are of shorter term than the standard 20 or 30 year note, and will require the Buyer to refinance or pay off the note in a few years. Usually no more than ten years but often as short a time as three to five years. This is called a "Balloon Payment".
So How does it work?
A Seller Carry-back purchase works much the same as a purchase if the buyer were acquiring a loan from a lender. The Arizona Purchase Contract is used, just like it would be in a regular transaction, the only difference is an additional Addendum that addresses the "Carry-Back" Terms. (If you would like to review one of these documents please call me, I will be happy to send you a sample copy).
The main differences are that the Down Payment Requirement is usually higher, and the Interest Rate will be a few points higher than it would be through a lender as well. The Seller may or may not require a Credit Report. A good Agent will ask the Buyer for Proof of Funds to Close the Transaction before the offer is presented and/or accepted by the Seller.
There could be additional terms in the "Carry-Back" Addendum that prevent the buyer from making any major changes to the property without the Seller's Express Written Permission. They can not "waste" the property and often can not not do any major renovations without the Seller's permissionor until the note is paid off.
Once the terms of the offer have been agreed to, the Buyer goes through the same process as a regular transaction. They do their Inspections, Order an Appraisal (if desired) and finally proceed to Closing on the Date specified in the Contract.
All traditional costs will apply including an Alta Lender Policy, a Title Report and Title Insurance Policy from the Title Company, & a Home Owner's Policy covering the property from Loss. Additionally it will have been agreed upon at the onset who will pay the monthly Servicing Fee associated with the collection and disbursement of the payments to the Seller, the Insurance Company, & for Taxes. Traditionally this is a Buyer Cost.
There you Have it! An alternative for those who have had some issues that won't allow for a traditional Loan. It works if the circumstances are right, call an Agent to see if it could be an alternative for you.
Sandra Paulow, Associate Broker, GRI, SFR, REALTOR®
FROM CONTRACT TO CLOSING, "EXPERIENCE" MAKES THE DIFFERENCE