Home financing to get creative in 2009

"Creating financing" is one of the items that is "in" for 2009, according to an annual survey conducted by Mark Nash, a real estate author who uses a network of 839 Realtors in all 50 states and eight Canadian provinces to acquire consumer responses to a variety of housing questions.

Nash, whose book "1001 Tips for Buying & Selling a Home" is a helpful guide for consumers considering the residential market, believes that seller financing, or "carrying the paper," will return to popularity this year along with the lease-option. The lease-option allows a potential buyer to lease the property and have some, or all, of the lease money applied to the purchase price if the potential buyer exercised the option to purchase.

In a conventional lease with option to buy, the seller charges the buyer a nonrefundable fee for the option to purchase the property at some agreed-upon point in time. The amount can vary depending on how eager the seller is to sell and the size and quality of the house. Typically, the higher the fee, the better the buyer maintains the property.

Because the lessee has made no down payment, the monthly rental fee is typically higher than prevailing market rates. The two parties agree on what portion of the rent will be applied to the down payment. Any amount can be credited.

The seller doesn't have to pay tax on the option fee until the option is exercised or the option period expires. If the option is exercised, the fee is considered part of the down payment.
It's often difficult to locate a seller willing to accept a lease-option unless the seller is eager to move. There will be many eager sellers in 2009.

Not all buyers are eager to seek bank financing, and an increasing number are finding they are unable to qualify under new stringent loan guidelines. Buyers would rather avoid loan costs and the possibility of a deal going south at the last minute. In return, they often offer the seller a slightly higher price.

Most of the time, seller financing works well for both sides, but both sides -- especially the seller -- should be prepared to handle the deal much like a small business. While the buyer can simply mail a check every month, it's up the seller to craft the ground rules.

If you participate in any sort of seller financing, make sure to build in safety features that protect your investment and sanity. In fact, it's not a bad idea to copy many of the loan requirements a local bank would insist upon.