Yet Another Seller Concession Question

[timd354]

Contract for Deed can produce huge affects on sale price...always in favor of the seller's bank account. They can mimic loan shark deals

Yes, in my experience contracts for deeds usually involved credit-challenged, desperate homebuyers that savvy property sellers are taking advantage of.

 

[Artemis Fowl]

Yes, in my experience contracts for deeds usually involved credit-challenged, desperate homebuyers that savvy property sellers are taking advantage of.

We look at these pretty carefully. Most terms we encounter around here are reasonable for what they are.

 

[residentialguy]

We look at these pretty carefully. Most terms we encounter around here are reasonable for what they are.

I guess considering that if the buyer defaults on payments in a typical contract for deed, the seller may cancel the contract, resume possession of the property, and keep previous installments paid by the buyer as liquidated damages...in 60 days, vs 6-12 months with traditional lenders. The seller can reclaim the property without a foreclosure sale or judicial action. ...then, unlike banks, they can turn around and sell it for a profit or rent it or live in it. Unlike most traditional mortgages, the majority of CDs are not fully amortized and have a "balloon payment" after a 1 year or two that completes payment on the house. To make this balloon payment, the buyer will almost inevitably need to obtain a traditional mortgage. If a buyer is unable to qualify for a mortgage at the time the balloon payment is due, he or she is likely to face cancellation of the contract. Let's not forget that the seller is not obligated to disclosure, so unplanned repairs are a risk. Often the buyers don't even get an appraisal to make sure they aren't getting a bum deal...they're just glad they got a house. And the buyers don't improve their credit with the purchase because most sellers don't report it to the credit agencies...so much for that "my credit will be better when the balloon payment is due" A lot of hopes and dreams, esp in a market that everyone says is a another bubble.

Did it sell at typical prices of other similar homes with traditional mtg? Maybe...but it's not my first comp. I use them in extreme need of comps and the stars better be lined up. It is a sale where the seller has the buyer by the ballz.

 

[Artemis Fowl]

I totally understand how that could be abused. Most sellers seem pretty annoyed at getting the property back. They thought they had finally got rid of that anchor.

 

[residentialguy]

I totally understand how that could be abused. Most sellers seem pretty annoyed at getting the property back. They thought they had finally got rid of that anchor.

Finally got rid of that anchor??? Houses are selling in record times...unless they're asking way too much, which supports what TimD and I were saying about how CDs take advantage of the distressed buyer.

 

[timd354]

We look at these pretty carefully. Most terms we encounter around here are reasonable for what they are.

Your area may be different, but most of the ones I have seen in the areas in which I used to appraise involved one or more of the following issues:

• properties in substandard condition that would not be eligible to secure an institutional mortgage, and/or
  
• an above market sale price, and/or
• had monthly installment payments that were based on a double digit interest rate and often included a balloon payment

These types of deals are extensively pitched in lower income areas and to persons who have crappy credit or a spotty job history and thus cannot qualify for a mortgage. You also see a lot of rent with purchase options in addition to land installment contracts in these types of areas as a lease with a purchase option is another way to extract additional money out someone who is desperate and unsophisticated.

 

[Terrel L. Shields]

Counter offer 2: SP- $170,000, seller to pay 3% of sales price toward buyer's closing costs and prepaid items. Seller's gross proceeds $164,900 Offer accepted.

Questions: What is the effect on the recorded sales price of the concessions in this transaction?
Would it or would it not be appropriate to adjust the sales price of this transaction (as a comparable) for the 3% concessions paid?

Price $165,000
3% = 4,950
LTV from bank - bank guideline is 80%. 80% of $165,000 = $132,000 BUT new price of $170,000 means bank will lend $136,000. Default. FDIC audits the bank lending standards, and determines that they actually lent $4000 more than their own guidelines are because they should have lent only $132,000. FDIC examiners fault bank and demand the entire value of the property be held against their loan reserves. 10% loan reserves was $13,600...now reserves to be held have to add that to total $136,000.

That is an actual example used by Mark Lewis in a presentation before the Arkansas State "Day with the Board" class which was attended by 400 plus appraisers. If you don't know who Mark Lewis is, then check the roster of the AQB.

 

[residentialguy]

Insight on Contract for Deeds
http://www.startribune.com/jan-14-contract-for-deed-can-be-house-of-horror-for-buyers/185756982/

 

[Artemis Fowl]

Please note the "for what they are" part.

Your area may be different, but most of the ones I have seen in the areas in which I used to appraise involved one or more of the following issues:

• properties in substandard condition that would not be eligible to secure an institutional mortgage, and/or
  
• an above market sale price, and/or
• had monthly installment payments that were based on a double digit interest rate and often included a balloon payment

These types of deals are extensively pitched in lower income areas and to persons who have crappy credit or a spotty job history and thus cannot qualify for a mortgage. You also see a lot of rent with purchase options in addition to land installment contracts in these types of areas as a lease with a purchase option is another way to extract additional money out someone who is desperate and unsophisticated.

I see these often for option 1. Condition issues. They are often not above market price nor have balloon payments.
FYI I'm not defending abuse of this tool but I'm not stereotyping those who use it either.

 

[Peter LeQuire]

All of the above, but most of the seller-financed residential purchases I have looked had interest rates at or near conventional rates prevailing at the time of sale; involved significant down payments; involved 15-, 20-, or 25- year terms; and ballooned at 5-7 years. Most of these sellers were pretty careful about looking at buyers' credit, and employment abilities. Such seemed more common when the buyer had a residence to sell; often, sellers were able to get significantly higher return from mortgage than from a savings account or CD.