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Buyer $5,000 short: How To Close The Gap

Dear Ginny:  We need $237,900 to pay off our first mortgage and to cover closing costs. We have an offer from some buyers who qualify for a total purchase price of $233,000. We have to move because of my job change. We have the money for the downpayment on our next house. If we take this offer we will have to use part of our downpayment money to close the deal. That will probably put us short on our next house. Our agent says we should be thankful we have a preapproved buyer who can actually close the deal. Do you have any suggestions? –John W.. Dear John: First, if you have a preapproved buyer who can definitely close the transaction, it would be very smart to take the offer, even if it’s $4,900 less than what you need to pay off the loans and closing costs. There has been quite a bit of commentary in the press about a new wave of foreclosure properties entering the market in 2010. This could be well over a million properties. A flood of new inventory would have the effect of lowering prices even further. The other concern is that our government is having trouble selling Treasurys. The lack of demand will probably force the government to raise the rate of return to attract buyers for our debt. When these costs increase, buyers experience them as an increase in the interest rates. When rates go up, the number of buyers who can afford your home decreases. Thus, you could be facing the double whammy of more foreclosure properties competing with your property, plus a reduced buyer pool if interest rates increase. When you are ready to purchase your next home, an increase in inventory means that you may be able to get a much better home at a lesser price. Even if interest rates increase, however, many people will lower their price to move their property. Given that you have money in the bank and enough to purchase another property, a short sale where the lender takes a reduction in their payoff amount is probably not a viable option for you in terms of bridging this gap. Here are some other alternatives to consider. 1. Is the buyer going for a fixed-rate or an adjustable-rate mortgage? If the buyers’ lender qualified the buyers for a fixed-rate mortgage and the buyers really want your house, perhaps they would be willing to apply for an adjustable-rate mortgage? This can be a great solution for someone who is just starting out and who doesn’t plan to be in the property for 30 years. 2. Does the buyers’ lender offer a buydown program? Many lenders offer buydown programs to help borrowers qualify as well. The most common buydown is known as “2-1.” Assume that the rates are at 6 percent. A typical buydown would be 4 percent for year one and then 5 percent for year two. At the beginning of the third year through year 30, the rate would go back to 6 percent. At closing, the borrower or the seller prepays the difference in interest for the first two years. For example, if your purchaser is obtaining a loan of $200,000, the buydown amount would be two percentage points, or $4,000, the first year, and $2,000 the second year, for a total of $6,000. The $6,000 may be added to the purchase price, provided the comparable sales are high enough to support the higher valuation. The buyers would qualify at the 4 percent interest rate, which would allow them to obtain a larger loan. You could use this same strategy on your purchase. 3. Can the buyers qualify for more by obtaining an equity loan? Several years ago I had a situation where the lender was extremely picky about borrowers’ credit ratios. The clients had a new car that was being paid off over five years. The way the lender suggested that they solve the problem was to take out an equity loan from their credit union as part of the purchase and pay off the car. (The borrowers were putting 20 percent down.) This lowered their debt ratios and allowed them to qualify for a larger loan. 4. Would the buyer be interested in any of your furniture, appliances, big-screen television, or other decorating items? Furnishing a house can be an expensive proposition, especially for first-time buyers who are often stretching to purchase. For example, you may have a washer, dryer or refrigerator that is in good condition that you could include in the purchase. You could arrange to sell these items outside the real estate transaction to account for all or part of the difference. (Please note that personal property items generally require a bill of sale. Check your local city, county and state Web sites for the rules regarding the sale of personal property.) 5. Share the pain I’ve never been a fan of cutting commissions. Unless your agent is the supervising broker, the agent cannot agree to cut a commission, as the contract is between you and the agent’s company, not the individual agent. There is also a risk in pursuing this approach. The buyer’s agent may decide he doesn’t want to cooperate and takes his buyer elsewhere. Some supervising brokers will say, “Do whatever you want, but it’s coming out of your split, not ours.” In your case, if you split the difference three ways — between the buyer, you, and the two agents, the difference for each party is $1,633. No one is happy about having to come up with extra cash, but sometimes that’s better than starting over. Given the current environment, closing with this buyer may be the best bet. If I were in your position, I would do whatever I could to make this happen.