Creative Terms Make a Comeback

With the economy showing signs of uncertainty on a national level, we are seeing inventory start to rise and a corresponding softening of prices for our local real estate. There are still a few listings that get snapped up out of the gates because of their premium location or attractive pricing, but if a home doesn’t sell during the initial surge of activity when it first hits the market, sellers should increasingly be prepared to settle in for an extended marketing period that will likely involve periodic price reductions. 

As they enter this more extended phase of their listing, we are starting to see a broader assortment of terms offered than sellers would have likely considered during a stronger market. Under the axiom that you can negotiate either for price or terms, astute buyers and their agents have started to propose creative solutions to help them overcome barriers such as needing to sell their current home under high-pressure conditions in order to buy the one they are trying to get, or giving up their existing low interest rate loan in the short run for a new loan at the current rates at twice the rate they have been paying.

One alternative to making an offer contingent on the sale of the buyer’s existing home is to explore whether the seller will grant a short-term lease with an option to purchase. This will usually require some non-refundable option money up-front to merit pulling the home off the market for the 3- to 6-month period the seller might be willing to consider, but it offers the benefit of having their mortgage and carrying costs offset by the rent to be paid under the lease. And for the buyer, it relieves the pressure of a release clause that typically hangs over an offer made contingent on the sale of their property.

We have also seen a resurgence of offers made subject to taking title under a wraparound deed of trust, or AITD, where the buyer makes payments to the seller who remains primarily liable under their old loan and passes their payments through to the original lender. The allure of this arrangement is that it temporarily gives the buyer access to a lower interest rate than is available through bridge financing—a practice understandably not appealing to the lender. The exposure is that the underlying note usually has an acceleration clause which allows the lender to call the loan if they become aware of the transfer of title. Because of this, it is only under limited circumstances an AITD might work as an interim short-term strategy, provided the parties have been sufficiently apprised of the risks and have a fallback plan for paying off or refinancing the note if it gets called.

It remains to be seen whether these types of practices become more commonplace as we continue to navigate changing economic conditions. And in the meantime, it keeps us on our toes as we are reminded of how many different ways there are for a buyer and a seller to come to an agreement.