Home sellers step up as last-resort lender to poor-credit buyers
Sue and Douglas Reed knew no bank would give them a mortgage — not with a bankruptcy and two foreclosures fresh in their credit history.
They turned to Hilarie Walters, whose childhood home on 15 acres in Marshall, Mich., had been on the market since 2009.
The unemployed single mother of twins agreed in December to sell the property to the Reeds for $105,000.
She also consented to a risky payment plan that in effect makes her the couple's mortgage lender.
Financing provided by home sellers, popular in the 1980s when mortgage rates reached 18 percent, is making a comeback in markets such as Michigan that have been hit hard by foreclosures and where tightening lending standards and years of economic distress have drained the pool of creditworthy buyers.
For a small, but growing number of people, it's the only way to get a deal done.
"This is the American dream, and we're going for it no matter what," said Sue Reed, 56, who sells snacks from a trailer at estate auctions and going-out-of-business sales.
"We'll either make it or it will break us."
Last year, 52,991 U.S. homes were purchased with various forms of owner financing, up 56 percent from 2008, said Realtors Property Resource, a subsidiary of the National Association of Realtors. Such deals accounted for 1.5 percent of all transactions in 2010.
"Anytime the market is in this much trouble, people have to find ways to get it to function," said Dennis Capozza, a professor of finance at the University of Michigan.
Capozza has direct experience with seller financing: He purchased a friend's foreclosed home a couple of years ago and allowed him to buy it back in installments.
The Reeds are using an increasingly popular form of seller financing known as a land contract, also called a contract for deed, in which the buyer takes immediate possession of the house and the seller holds legal title until the debt is paid.
Down payments, interest rates and other terms of land contracts are subject to negotiation.
There is often a balloon payment in five or 10 years, when the buyer must find a way to pay back the seller or risk losing the house and the money already put in.
The Reeds put down $25,000 and make monthly payments of $565, reflecting a 7 percent interest rate amortized over 30 years, with the full balance due in five years.
Walters, who lost her job as an automobile engineer in 2008, the same year she inherited the ranch, hopes the Reeds can pay off the loan sooner.
"They're paying me interest every month, but I'd rather have the money and be done with it," said Walters. "It does make me nervous."
The risks in such deals are significant for both buyer and seller, said Jason Hoffman, a real-estate attorney in Faribault, Minn., who calls the participants "hope-ortunists."
"Each of them is seeking an advantage in an otherwise difficult situation, and they're hoping everything will work out as envisioned," Hoffman said. "It's an act of faith."
Most mortgages contain a "due on sale clause," meaning the lender can call the loan if the home is transferred.
While community banks sometimes grant exceptions, many homeowners take their chances, hoping lenders won't ask questions as long as the payments stream in, he said.
A buyer in this arrangement has little protection if the seller goes into bankruptcy or loses the property to foreclosure, Hoffman said.
The seller's risk is that the borrower won't qualify for a bank mortgage when the land contract comes due, he said.
And a continuing drop in home prices can imperil the deal for both sides, he said.
Mark Cook, 30, a real-estate agent in Lake City, Fla., said he sees an untapped market in the millions of homeowners whose credit has been ruined by a foreclosure or short sale.
More than 3 million homes have been repossessed since 2006, according to RealtyTrac, an Irvine, Calif.-based data seller.
Cook said he is working with a Canadian investor who bought and renovated four homes in Florida since September, selling them for a premium to buyers needing financing.
They market homes to buyers with foreclosures in their credit history, along with second-home purchasers and self-employed borrowers who don't show enough income on their tax returns to qualify for traditional financing, he said.
Cook offers an interest rate of 9.95 percent and balloon payment after seven years to buyers who can put down 20 percent in cash.
"We are advertising in markets that are cheap and we're satisfying the consumer's appetite for a bargain," Cook said.
"Assuming you're not creditworthy and have cash, we are your avenue for buying a home."
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