Alternate Methods To Sell Property In Arizona
The pool of home buyers now has a bigger proportion of people with bad credit, but lot's of those potential buyers simply got caught up in the recent deflationary cycle and there are just as many people who can't quality for a mortgage because the guidelines have become stricter, maybe to a point of over-compensation leaving lots of people who can afford a home, but can't get the financing.
This is where some savvy sellers can come in with what many call creative financing, but it's no so much creative as alternative with lots of benefits to both parties in many situation.
Of course, any transaction, including alternative transactions have risk associated with them. At this point in the market the risk is not so great as it was a few years ago, but when a buyer defaults they can drag out the disbursement process for quite a while, so there are ways that provide sellers with added protection.
Below are 5 different ways a seller can sell without selling for cash or with-outside financing whether your property has a loan or not.
Seller carry-back: When you use this method of selling you, as the seller, simply act as the mortgagor, i.e. the bank to the buyer with similar terms and a similar relationship. You set the interest rate, the fees, the payment intervals and when the note is due.
In a case when the buyer defaults you have to go through the same foreclosure process as a lender would which is good and bad, and that's where an 'agreement for sale' comes into play. In other states this is often called a 'land contract'.
We just finished completing one transaction that was an 'agreement for sale.'
Agreement for sale: In an agreement for sale the seller agrees to sell the property to the buyer on similar terms as in a seller carry-back but unlike when the seller carries the note the deed does not transfer. The deed is held by a third party that keeps it until the debt is paid off.
There is still title work involved and it should still be done via title company, but the only thing recorded at the public records is an 'agreement for sale'. With the AforS, in a default situation, the seller may more quickly get a return of the property from the mortgagee. It can be as soon as 30 days, but it depends on how much equity there is in the property. An AforS, can also be used in a wrap situation.
A Wrap is a bit more complicated, it always is when there is existing financing. The seller may sell the property and put off the debt onto the new buyer, but the seller is still liable for the debt and if not paid and it will have an impact on the seller's credit.
There for, it is imperative to use a third party servicing company to collect the payments and escrows and disperse them. The buyer as well should not pay the seller directly because if the seller collects the money and does not pay then the buyer and seller will both have complications.
Lease option: this is a good one for sellers, but not such a good option for buyers. It's good for the sellers because they get some option money and a higher rental rate and very few options are exercised. Of all the ones I did personally only on exercised the option to buy.
If you have the agreement written well then the option money and additional funds are lost to the buyer and simply additional income to the seller. Please note that a lease option needs to be written carefully as not to give the tenant/buyer implied equity, thus amongst other things the purchase contract/option needs to be a separate contract, not at all connected to the lease.
Equity sharing: this could be a good one and I know a few people who have used this. This is simply a way by which both the seller and buyer participate in the transaction and have an equity stake. The seller or investor can put up some money, stay on or get put on the title and the tenant pays a mortgage and once sold the equity is split according to predefined rules.
This method is not only good for current owners, but investors as well, though it takes a very good agreement to preclude any issues that may arise from none performance by the other party.
There are other methods, but the above 5 is a good start and these are the more commonly used ones.
Each transaction is different and some will require that you speak with legal counsel. Such is the equity sharing agreement, but others are easier to perform and understand like a seller carrying a note or the agreement for sale.
Consider this. You buy a property for cash as an investor and then you can resell it at a profit or keep it as a rental. If you sell it you simply get the equity you built into it through the short transaction which depending on how long the period is from when you purchased it to sold it could be taxed from 15% to the top brackets.
If you lease the property you have to worry about repairs and or management.
If you sell the property and carry the note you will not only get the profit and spread out over a time period so you may pay less taxes, but you will also collect a return on the money you lend to the borrower at a higher then market rate.
If you don't need the cash right away, if it was going to sit in a bank at less then 1% or the very volatile and risky stock market then why not get an above market return with less risk, secured by real estate without the hassle of a rental.
Original Article Published at Phoenix Market Trends
Canadian's Guide To Buying Properties In Phoenix, AZ
