Creative options for sellers in a changing real estate market

Due to rising interest rates and affordability issues, home sellers are facing challenges we have not seen for 20 years . Buyers are demanding more closing costs, more repairs, and more off of the asking price. We’re seeing the opposite effect from 2020-2021, where sellers had no issue selling homes, having contingencies waived, and getting bids over asking. If you read our last newsletter, we discussed some of this and how a more neutral market can be a benefit for both parties, but it still  comes with its own set of challenges. 

Below I’ll explore 3 alternative sales options that I’m coaching potential seller’s on so that you’re well equipped with a backup plan when you, your family, or your friends choose to list. 

1. RENT.

2. OWNER FINANCING.

3. SUBJECT-TO. 

These options are meant to be alternatives for those with low equity positions, those looking to invest long term, and those having challenges getting the price they need to sell.

RENT: 

Of these three options, this is likely the one you’re most familiar with. Almost everyone has rented a home, condo, or townhouse previously and had a landlord, but many people never become a landlord themselves. For those with high equity positions and low interest rates, this is certainly something to consider. Especially if you’ve lived in the home for 2 or more years consecutively. Many people are aware of the tax benefits associated with living in a home for 2 years, if you’re not, it’s TAX FREE MONEY! For single individuals you can exclude up to $250,000 in capital gains from an owner occupied home after 24 months, and as a married couple you can exclude up to $500,000! 

So what does that have to do with renting? Many people don’t realize there is a nuance to this tax rule every 5 years. This means you could live in your home for 2 years and rent it for an additional 2-3 years after buying another home to occupy, sell after the rental period and still realize the capital gains tax free. Many people may not be able to buy without selling and many may not want to be landlords as it does come with its own pitfalls such as wear and tear, repairs, and additional liability. It’s also important to consider other benefits such as depreciation, cash flow, and more advanced tactics such as cost segregations and 1031 exchanges. 

If you’re considering selling or have had trouble selling your home, renting can be a great alternative option that still allows you to control the property and realize the same or similar benefits. 

OWNER FINANCING: 

Many people have heard of lease-to-own, but not as many are familiar with owner financing. You might ask: “How can I owner-finance my home, especially if I have a mortgage? I still owe the bank money.” If you own the home outright, you can provide owner terms and financing just like a bank does as the first lienholder. You and the buyer get to determine what the terms and conditions are: downpayment amount, interest rate, term of loan, balloon payment or not, etc. Ultimately, it puts you in control of the asset without the liability. 

If you still owe money to the bank, you can offer a land contract for the deed. This allows you to provide owner terms and still pay your note to the bank on time. There are many nuances to both of these options, but ultimately can be an amazing way to maintain cash flow, get amazing benefits, and relinquish liability of repairs, maintenance, and taxes. 

SUBJECT-TO: 

This option is really a last resort option in my opinion, but has become quite prevalent due to the recent rise in interest rates and the amount of existing mortgages under 4%. 

Subject-to real estate deals happen when you buy or sell a property with an existing mortgage. Under a subject-to deal, the buyer takes over the property, but the seller retains the mortgage. The buyer makes mortgage payments on behalf of the seller, and the lender is generally not informed that the property has been transferred, though a promissory note can still be executed, just not recorded. 

For buyers, subject-to is an excellent way to buy a property when you have insufficient credit, when you want to buy a property with fewer closing costs, or want to secure a low interest rate. For sellers, subject-to is a good way to quickly dispose of a property if you need immediate debt relief or if you’re facing foreclosure, though not all sellers need to be distressed for this option. Many with low equity positions can utilize this and could be a good option for those who can’t rent the property due to negative cash flow. Foreclosure is a risk for buyers and sellers participating in a subject-to sale, and it’s generally a high-risk investment. This is a strategy many are doing, but not doing well or are performing improperly. There is a right and wrong way to take over existing mortgages, but requires acute attention to detail and the right attorneys and lenders to be involved. 

If you’re really savvy as a buyer, you’ll do what’s called a “wrap” which is a combination of subject-to and owner financing… but we can leave that for another day. 

Final Thoughts

There’s more than one option available to you as a homeowner if you’re looking to sell. It’s important to consider your financial position and your goals whenever selling a home, but also important to know the options available to you. Many agents and homeowners don’t know about all of these options and strategies. If you’re considering selling your home this year, we can always assist the traditional way, but if you’ve got a unique scenario or just want to explore your options, we can set up a strategy session to help you make the right decision.