Selling your house in a 'normal' market

by Michael Eastham, CPA CRMS

In the September/October issue of Lake Mary Life, I described what I called a ‘normal’ real estate market. As we transition from the recent seller’s market into this more normal market, sellers should be looking for ways to make their houses stand out in the crowd, in order for them to sell more quickly. In this article, I will explain a creative way to accomplish this goal.

Let me start by asking a question: Is a house more likely to sell faster and for a higher price if it has:

1. a larger mortgage?
2. a smaller mortgage?
3. It makes no difference

Today you will learn why you are more likely to sell your house faster, and for a higher price, if you have a larger mortgage with your equity in a safe, liquid side fund, earning a reasonable rate of return.

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Let us compare two homeowners who live on the same street in a desirable neighborhood, close to good schools and shopping. Call them Mr. Smith and Mr. Jones. Each owns a property valued at $400,000 with the same square footage and similar amenities, including a pool. One major difference exists, but it has nothing to do with the physical properties. Mr. Smith was never comfortable with a large mortgage and as a result, rapidly prepaid his mortgage down each month, leaving most of the equity in his home. His mortgage balance is $50,000. Mr. Jones, however, repositioned most of the equity out of his home, keeping it in a safe, liquid side fund. His mortgage balance is $320,000. Both sellers had a compelling need to sell their homes quickly and move on to their next abode.

Enter Ms. Buyer: She just moved to town and has recently started a new business. She is interested in living in one of the two aforementioned homes. Although her credit is very good, she has had previous difficulty in qualifying for traditional mortgage financing. She has accumulated $40,000 for a down payment.

Ms. Buyer approaches Mr. Smith, offering him full price for his house with a $32,000 non-refundable deposit, if he will agree to sell her the house on a contract for deed, or lease with an option to purchase*. The problem is that Mr. Smith has all his equity trapped in the bricks, mortar, foundation, and dirt of his house, and needs to sell his house so that he can use the equity towards the purchase of a new house. He is not in a position to qualify for a new mortgage unless he sells his house. He turns down the offer and systematically lowers the price of his house month after anxious month until he finally finds someone to cash him out.

However, when Ms. Buyer shows up at Mr. Jones’ door with the same full price offer (perhaps even at a premium), he jumps at the opportunity. Why? Because he has already repositioned most of his equity in that liquid side fund. He has the ability to move on and purchase a new house with or without a down payment. He is not at the mercy of a housing market that dictates his strategy. In fact, if Ms. Buyer were to default, Mr. Jones could simply put the house back on the market and do the same thing all over again AND keep the $32,000 deposit (not that he would want that to happen)!

Many of my clients are in Mr. Smith’s situation—they want to buy a house, but have to sell a house first. I have recommended that they implement Mr. Jones’ strategy by doing a cash-out refinance, and then put their house on the market. Offering seller financing, creative financing options, lease with option to purchase, contract for deed (or something similar) will attract more buyers, thereby increasing the chances of selling the house faster, and for a higher price.

Further, Mr. Jones is not compelled to contribute money toward closing costs, and thus walks away with more money at the end of the transaction. In a lease purchase or contract for deed, the buyer is much more likely to take care of the property as if it were her own. She has made a commitment to purchase the home, having made a financial investment; the home takes on a totally different character than if it were simply a rental property.

When you are trying to differentiate your home in a normal real estate market, it pays to be creative and think outside the box. This strategy 1) gives you the benefits of a sale, 2) allows you to move on to your next home more quickly, and 3) significantly increases the chance that you will negotiate more favorable terms than if you sold it the traditional way.