Seller Real Estate Financing is Ideal For Retiring Baby Boomers

The last few years have been tough for the real estate market. The Great Recession and its ongoing aftermath have seen millions lose their jobs and homes. Because of short-sighted and often punitive policies by lenders and government-backed agencies, the buyer pool for the real estate market keeps shrinking. But these “outcasts” denied access to traditional financing represent viable buyers for sellers willing to consider creative financing. This will lead to a surge in seller carry-back financing, especially as Baby Boomers begin to retire and want to downsize in a slow real estate market.

Whether due to a job loss or a strategic default, when someone’s home goes into foreclosure the homeowner’s credit file is branded with a crimson “F” and they are barred from received a standard home loan for three or more years. The period for short sales is 2-3 years, assuming the required decimation of credit can be rebuilt within that time. Chapter 7 bankruptcy leads to 2+ years suspension of home-buying privileges for low-down loans backed by Fannie Mae, Freddie Mac or FHA.

Now, these unfortunate souls are not deadbeats. Most are just unlucky in that they worked in a private enterprise, an arena unshielded from Depression-level unemployment and dramatic drops in incomes. So lender attitudes and industry policies preventing them from buying a home for a number of years are really akin to “kicking them while they are down.”

But most will eventually recover and find employment or salvage their small business. Then they will be in the market for buying a home again. However, they will quickly discover that they are shunned by the institutional lenders.

Fortunately, their predicament coincides with another phenomena – the growing number of Baby Boomers that are either voluntarily or involuntarily (because of job loss) going into retirement. A good percentage of this generation wishes to downsize to reduce their expenses in retirement, but have difficulty selling their home. They are competing with a glut of foreclosures, investment properties and short sales for a small pool of qualified buyers. Despite historically low interest rates, worries about the economy and a growing number of excluded buyers makes selling a home today difficult today in many parts of the country. Many Boomers wind up just renting their home out because they can’t find a buyer.

The stars are aligning, however. Boomers and others can tap into the growing population of potential buyers who are ineligible for normal home loans by offering carry-back financing that circumvents standard lender approval criteria. Moreover, retiring Baby Boomers reap significant tax benefits from receiving payments over time instead of lump-sum profits. They can also receive a higher price or enhanced interest rate compared to current market figures. For many sellers, carry-back financing is the perfect way to supplement their retirement income with secure monthly payments at a much higher rate than that received from bonds, CDs or annuities. In the process, they will also get renters or installment buyers who are more likely to take good care of their property.

Buyers benefit too. First, they can buy a home despite being black-listed by institutional lenders. Second, they avoid many of the fees (e.g., points) that tradition lenders charge. Overall, it a much better deal than pursuing a high-rate short-term or subprime loan to buy a home.

Homeowner seller financing is nothing new. There are several universally accepted forms of carry-back financing. The two most popular are:

Lease-Purchase Option: An installment sale where the tenant has a purchase option that can be executed at under specified conditions. Typically, part of the monthly rent is applied towards the down payment. The buyer gains title to the property upon satisfying certain mutually-agreed contractual conditions.

All-Inclusive Trust Deed (AITD): Here the homeowner “wraps” existing liens within a new loan. The seller continues to be responsible for existing loans on the property, but makes a profit override on the entire total of all loans, thereby amplifying his return. The buyer gains title to the property and makes payments to the seller who in turn pays existing lenders.

In all cases of seller financing, it is the seller who decides the credit-worthiness of prospective buyers. The seller assumes the risk normally taken by an institutional lender. Sellers can be assisted in this process by credit reports, standard disclosure forms and experienced real estate professionals. In today’s economy, a recent period of income disruption and bad credit is often bookmarked by a past history of stable income and high credit scores on one end and new employment on the other. This reflects the profile of hardworking families recovering from job losses and perhaps a foreclosure or short sale. It is up to the seller to decide if he wishes to extend credit to them. To sweeten the pot, additional security such as a co-signer on the carry-back note or a lien on personal property or other real estate can also be considered.

Carry-back financing is typically secured by a trust deed or mortgage instrument on the property that allows an expedited foreclosure process to recover the seller’s asset should the buyer default on payments. Pick the right buyer and creative financing like this is very secure. Worst case, the seller gets his property back to put it on the market again. And the initial deal can be structured to ensure that the seller has sufficient funds to cover costs for this contingency.

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