'Creative financing' tactics to lure home buyers

Retired seller moving abroad not looking to make big profit


By Benny L. Kass
Inman News

DEAR BENNY: I recently retired and am planning to move out of the country. I own a single-family house in a desirable area. I owe only about $70,000 on my current mortgage. The value of the house before the recent market crash was about $470,000. Despite the current market, numerous people have looked at the house, but only one has made an offer (a very lowball offer). I am not desperate to sell, but I want to move on with my retirement plans. The house is older, but has recently had about $30,000 in improvements in order to appeal to buyers.

Since I will not need the money from the sale of the house, how could I offer a very appealing owner-financed mortgage, perhaps with an introductory "teaser rate"? I called the bank that holds my mortgage, but it does not have anything in place to assist individuals with owner-financing. I could offer the house with a fair rate, but I do not want to have to fly back from another country to collect late payments, foreclose, make repairs or redo legal paperwork. Therefore, I am apprehensive about renting or offering a mortgage to anyone with less-than-perfect credit. Any suggestions you could offer would be appreciated. --Bob

DEAR BOB: There are a number of ways that you can market your house with what I call "creative financing."

First -- a land sales contract. Here, you enter into an agreement with your buyer that he or she will start making monthly payments. Your attorney will hold the deed to the property in escrow. When the buyer is able to obtain sufficient funds to pay the entire contract price, the deed will be recorded in the buyer's name. If the buyer does not make the payments, the agreement states that he or she will immediately move out, and you still own the house and keep the moneys that have been paid thus far.

Second -- a wraparound mortgage. You sell the house and take back a mortgage (deed of trust). Since you already have a mortgage that has not been paid in full, this would be a second trust.

Example: You sell the property for $470,000; the buyer pays you $20,000; and this second trust is for $450,000. Let's assume your current mortgage carries an interest rate of 5.5 percent, and the new mortgage is at 6.5 percent. You receive payments based on the higher mortgage rate, but pay off your lender at the existing rate. In my example, you will make 1 percent on the money you owe your bank, and 6.5 percent on the difference.

Third -- a seller take-back. If you -- or your buyer -- can come up with the money to pay off your outstanding mortgage, then you can take back a first deed of trust at an interest rate to be negotiated. You can start off with a low rate for a couple of years, and have it increase periodically.

You do not have to worry about flying back to handle these issues. You can appoint a bank or an attorney to handle all of these issues, including collecting the monthly mortgage payments or assessing any late fees, and you can enjoy your retirement wherever you are.

DEAR BENNY: I am on the board of directors of a 112-townhome development. A new development is being built right next to ours, and the developer has requested permission to tap into our water line. I assume that since he asked we must have some rights. We have an attorney researching this. Our development is approximately 22 years old. What are the pros and cons for allowing this and should we charge a fee? Thanks for your advice. --J.D.

DEAR J.D.: It appears obvious to me that your association has certain rights; otherwise, the developer would not be asking for your permission.

The very first thing I would have your attorney do is contact the water authority in your county, which must be involved in any discussion and decision that is made.

It concerns me that your water line will be used by another development. Is this only a temporary request (which under certain conditions would not bother me as much) or is this a permanent situation (which in my opinion is not acceptable)?

Yes, if the association and the developer enter into a written agreement, the developer should pay for the use of your water. But I am not sure how this can be determined. I suspect that a submeter will have to be installed, which must be at the expense of the developer and subject to the approval of the local water authority.

Bottom line: It's not a good idea.

DEAR BENNY: My daughter and her boyfriend are thinking about buying a house, and she is putting a larger down payment. Is this a good idea? --Doug

DEAR DOUG: There are ways to protect your daughter should they end up separating before marriage. As you no doubt recognize, that is always a possibility.

There are two ways they can take title -- either as tenants in common or joint tenants with right of survivorship.

Under the latter arrangement, should one of the owners die, the other owner will automatically -- by what is known as "operation of law" -- become the owner of the entire property. Unfortunately, very few states (to my knowledge) allow a disproportionate interest with such a tenancy. Basically, both parties own the entire property equally. So there is no guarantee that your daughter's investment in the property will be protected.

In a tenants-in-common arrangement, ownership can be based on the amount of money that each party invests in the property. So, for example, if your daughter is putting up 75 percent of the down payment, title can be held as tenants in common, 75-25.

With that arrangement, should one of the parties die, his or her interest will be distributed in accordance with that person's last will and testament, and probate is required. So if your daughter has a larger interest, her share will go by way of her will.

Accordingly, at least until the couple gets married, I would recommend a tenant-in-common arrangement. Once they get married, if they so desire, they can change the title into tenants by the entirety, which is reserved for husband and wife.

I also suggest that they enter into a "partnership arrangement," which would spell out such matters as what happens if one party wants out of the deal, dies or cannot afford to assist with the house payments.

DEAR BENNY: My husband and his mother bought a commercial property as joint tenants seven years ago. His mother has developed a mental illness and has announced that she wants to file bankruptcy. What are his legal options? His mother's business is located in the building, which she is going to include in bankruptcy. She has quit making mortgage payments but will not agree to sell. --Leigh

DEAR LEIGH: This is obviously a difficult problem for you and your husband, especially since his mother is involved. I am not a bankruptcy attorney and suggest that you immediately consult an attorney with that expertise.

Did your mother-in-law ever give anyone her power of attorney? That should be investigated. If there is such a document, the holder of that power may be able to take appropriate action and resolve the situation.

If there is no such power, you may want to consider going to your local court to have a conservator and guardian appointed to act on her behalf. Your mother-in-law will have to be in court, if she is able to do so, and the judge will have to find that she is incapacitated -- meaning that she does not have the capacity to make financial or personal decision on her own. Again, your attorney should be able to assist you.

Depending on what conditions the judge puts in the court order, a conservator will have full authority to investigate the matter and take all appropriate action. However, the conservator must act in the best interests of your mother -- and not your husband.

DEAR BENNY: We want to accept a contract on our property. The buyers disclosed on their financial statement that they have $10,000 in a checking account. They wrote the earnest money check for $20,000 from that account. All other items on the contract are acceptable. Do we have a contract at this point? --Greg

DEAR GREG: In order to have a binding, legal contract, there must be (1) an offer, (2) acceptance and (3) consideration. Money -- the earnest money deposit -- is the consideration.

In a follow-up e-mail, you told me that you do not want to sell the house now. So if you have not signed the document, there is no contract. You may have a problem with your real estate agent who may claim that you owe a commission based on your listing agreement, but that's a different issue.

If you have already signed, there is a contract. You should demand that the real estate agent holding the check deposit it immediately. Agents generally have the legal obligation to deposit those checks within a certain period of time -- usually five to seven days from receipt.

If the check is good, you have a valid, binding contract and it will be difficult to get out from under it. If the check is not good, there was no "consideration" and thus no binding sales contract.

I don't know why they wrote a check for $20,000 when they disclosed that they have only $10,000 in their checking account. It could be that they deducted the deposit check and then disclosed the difference on their financial statement.