Creative financing can lead to creative trouble

by Dan Krell
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Several weeks ago, my client encountered The Amazing Criswell of real estate. Without knowing anything about my client’s home, this real estate agent professed to know how many homes are for sale in his neighborhood, the price the home would sell for, and time it would remain on the market. Much to my client’s dismay, the agent expressed an interest to discuss a proposal to sell his home quickly and for more than the list price. Needless to say, my client did not call him.

There is always someone pushing their angle on how to sell your home faster, make more money, or buy with no money. Some of these “real estate solutions” could even be called schemes; many schemes are not practical, some are outrageous, and some are blatantly illegal. Presently, the temptation to think outside the box tends to be more prevalent since financing guidelines are more restrictive, and for many it means needing more cash for a higher down payment, closing costs, or reserves.

Aside from creative financing options that offer seller financing, land installment contracts, or leases with the option to purchase, there are schemes that provide creative gifts of money to the home buyer so they can qualify for their loan. One of the more blatantly illegal schemes involves a “gift” from the home seller to the home buyer while increasing the sale price to exceed the listing price; the gift is not disclosed to the lender as well as exchanged outside of settlement. This scheme essentially creates a 100% financing loan from a loan that technically requires some form of down payment.

A graduate student who researched this type of transaction for his Ph.D. in finance (as reported in the New York Times “The Cash-Back Mortgage,” June 10, 2007) found that the “cash back” scheme is more prevalent than previously thought. He found that people advertised such deals through advertising and through key words in the MLS (the study revealed 150 keywords were used).

Additional findings suggested that this type of transaction would occur when homes were on the market for long periods of time, yet sold above the original list price. Furthermore, these types of transactions tend be executed by the same real estate agents (who are either the seller and/or they are the only agent in the transaction). Ironically, most of these deals were perpetrated through loans packaged in bundles and sold on Wall Street.

A subtler form of this cash back scheme occurs when the seller provides closing help to the buyer, but raises the sale price beyond the list price to make up the difference. Although the closing help is disclosed to the lender and recorded on the settlement sheet, this transaction could be illegal. Federal law (18 U.S.C. 1014) forbids providing false statements and/or willfully overvaluing land to influence a lender’s behavior in providing a loan. In fact, a New Jersey State Judiciary committee stated that an attorney knowingly participating in such a transaction is ethical misconduct.

In today’s market, it is tempting to look for creative methods to sell or buy a home. However, before you agree to any creative financing proposal, consult with an attorney to determine its validity and legality.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 17, 2008. Copyright © 2008 Dan Krell.

Home Selling Tips

Because not all listed homes sell, you should be strategizing how to make the most of your sale. What to do? Here are some home selling tips .

Think about the basics that go into a successful home sale. The first is to price the home according to the comparables in the neighborhood. The second is to consider the condition of the home. The third is to have a marketing plan. And lastly, you should have a close working relationship with your Realtor.

Home selling tips

Of course your home should be priced according to the comparables in the neighborhood, and progress should be gauged with the other homes on the market in the neighborhood. That means besides pricing according to the homes that are comparable, your Realtor should expect results within the parameters based on those sales also. Regardless of what you hear, the seller sets the selling price. Your Realtor is only an advisor providing you the data and opinion.

Sale price

Comparing your home to similar homes that sold is critical in deciding a sale price. Comparables are homes that match your home in style and size. If you have a three bedroom rambler, you should compare your home to other three bedroom ramblers in then neighborhood.  Typically, comparables are restricted within a subdivision or within about 0.5 mile to 1 mile. And sales not older than six months (unless there is a lack of home sales).

Home condition

Why is your home’s condition important when deciding a sale price? If your home has deferred maintenance or hasn’t been updated for twenty years, it’s not going to get the same price as the renovated similar home across the street. Be honest with yourself about the home’s condition.  If your home is not in move-in condition, think about the cost of renovating in the price along with market conditions.  If it’s a buyer’s market, you may have to consider a lower price or the home will languish waiting for a buyer.  If it’s a seller’s market, there are more home buyers willing to buy a home with the intention of renovating it.

Marketing plan

You need a roadmap to success. If your Realtor has not yet presented you with a marketing plan, ask for one. Your Realtor should have a plan of action to sell your home. Putting a sign in front of your home and entering the information in the MLS is not typically enough sell a home. Market conditions frequently change, and your Realtor should have a concrete plan to sell your home. The plan should include not only how the home will be marketed, but how the agent will take you from contract to closing.

Your listing agent

The final aspect that is important in selling your home is the relationship between you and your Realtor. Besides having confidence in your Realtor, you should feel comfortable being honest (for good and bad).  It’s not a good sign if your Realtor is often defensive when you express concerns and needs. Your Realtor, on the other hand, should also be honest, as well as timely with information concerning your home. Besides communicating the activity of the potential home buyers, they should also keep you up to date with the neighborhood market keeping an eye on the other homes on the market.

How will you market your home and what will you do if the market changes? When you are interviewing Realtors to sell your home ask about their marketing plan. Ask about a home pricing strategy.  Ask how your home’s condition affects the price.  Ask how the agent communicates and what you should expect from them.