NELSON ZIDE
Buy-down popular

Birgit Sandoval is trying to sell six three-family homes in Boston.

To draw buyers, she is offering either to pay closing costs or help reduce a purchaser’s mortgage interest rates.

“The market is slow. Properties are not moving, or they are moving but much slower. The competition is stiff. There are a lot of properties on the market. I’m trying to be creative with selling my properties,” said Sandoval, a Jamaica Plain resident who’s been a landlord for 14 years.

The housing slump and the credit crunch are pushing more home sellers to think like Sandoval.

Sellers either are offering money to temporarily lower mortgage interest rates or full or partial financing to buyers who can’t obtain a mortgage loan. Local brokers say seller financing has become more popular because of the tougher lending environment.

“It is an extremely important part of the marketplace today,” said Richard Cahill, president of Norwell-based Jack Conway & Co.

Since buyers have a larger pool of homes to choose from and builders are offering a variety of perks that sellers can’t, some homeowners are using seller financing to entice buyers. Seller financing also can help borrowers who don’t have a strong credit history and can’t obtain an affordable loan.

Seller financing takes on various forms.

Instead of slashing asking prices, sellers might find it more appealing to “buy down” points, which can cost significantly less than a hefty price reduction. In a buy-down, a seller will place a few thousand dollars into an escrow account attached to the buyer’s mortgage, which cuts the interest rate a buyer has to pay for a fixed period.

“The mortgage buy-down [is something] we’re seeing more and more of, and especially when the seller is saying, ‘I can’t come down in price,'” said Nelson Zide, senior vice president of Whitinsville-based ERA Key Realty Services.

Dropping a home price by a small amount won’t attract a new crop of buyers, added Zide, but an interest rate buy-down could help get the attention of a few more home seekers.

One of the most common interest-rate buy-downs reduces a buyer’s actual interest rate by 2 percent in the first year of the loan and 1 percent in the second. Typically, a seller provides 1 percent of the full selling price for each point. A point is equal to 1 percent of the value of the loan. So if the selling price is $300,000, a seller has to put down $3,000 per point.

The lower interest rate can save buyers thousands on monthly mortgage payments. It also can be a strong incentive for buyers at a time when lenders have raised credit score requirements for loans with the most favorable interest rates and increased other fees.

“Realtors want to cut the [asking] price because they want people to get into the front door. The problem is, you get people into the front door but it doesn’t help them qualify for a loan if they’re marginal. Sometimes it’s best to offer two options based on the buyer and their credit circumstance,” Sandoval said.

The buy-downs have become very popular, according to Mikki Zeitouni, an agent at Gibson Sotheby’s International in Westwood. “A lot of brokers are doing that in our office now,” she said.

Jack Conway & Co. has handled at least a dozen transactions in the last month where the seller offered some type of financing, Cahill noted.

Cahill said the rate buy-downs can be particularly attractive to a first-time buyer who is short on cash and is looking at several homes with similar price tags. A seller who is offering financing can help the property “stand out,” he explained.

‘A Good Situation’

In Middlesex County, there are 13 properties listed for sale in which seller financing is available, according to Lexington-based broker Judy Moore, who is regional vice president of the National Association of Realtors.

“Seller financing has certainly been around for a long time,” said Moore. “We were dealing with it in the 1980s. It was a way a buyer could bridge a gap between what the seller wanted and what the buyer could get a mortgage for.”

Seller financing was common 20 to 25 years ago, when double-digit interest rates were challenging.

But Moore said seller financing disappeared for years when the housing market was strong and buyers had no problems with financing.

“In a good market, you don’t see [seller financing] at all,” she said.

In addition to interest-rate buy-downs, Moore said sellers can provide full or partial financing. In a full financing situation, a buyer can bypass a conventional lender and instead pay the seller monthly mortgage payments.

Sellers who own their home outright and generally don’t need the money from the home sale to pay off mortgage debt or buy another property are more willing to provide that option.

In other cases, sellers can provide a second mortgage to help buyers fill in a financing gap. “It’s one way buyers have been able to afford more than the bank will lend them,” Moore explained.

But sellers have to notify the first mortgage holder. “They want to make sure that their position is not threatened and the value of property isn’t devalued because of the second mortgage,” Moore said.

Seller financing can be beneficial for seller and buyers, according to industry leaders. Buyers can avoid loan origination fees and points, and first-time buyers who can’t qualify for a mortgage can have an opportunity to buy a home and build up equity.

Sellers, on the other hand, can get their property sold and reap financial and tax benefits as well. A seller likely will earn more from the interest rate that is being charged on the loan than from a traditional savings account. The seller also can avoid capital gains taxes because instead of receiving one large sum, he will be receiving smaller payments.

“It could really be a good situation all around if the parties are ethical and they are following the proper steps. They’ve had good legal advice and they’ve followed through on all the agreements,” Moore said.

But real estate experts say such arrangements can include risks.

“Certainly with the subprime market and the credit crunch, seller financing is an attractive way to get around that problem that the perfect borrower may face,” said Sami Baghdady, an Arlington-based attorney who is president of the Real Estate Bar Association.

But Baghdady said sellers should be careful to review buyer’s credit history and employment. “The seller doesn’t obviously want to be in a situation where they have to foreclose on the buyer in a few years,’ he said.

Baghdady said he would advise clients to require a significant down payment – as much as 20 percent – because property values are not appreciated. And he recommends that sellers take out a mortgage on the house.

At the closing, sellers should collect the down payment and give the buyer the deed. The buyer should then sign a promissory note for what’s owed. “So if a borrower didn’t pay, the seller would be able to foreclose,” Baghdady said.

Buyers also should be cautious, Moore said, because the seller retains the property title. So if a seller still has any outstanding financing on the property, the buyer can be at risk of losing the home if the seller doesn’t pay the debt.

“You want to make sure you have a reputable seller,” Moore said.