Jim Valentine on Real Estate
With interest rates increasing as they have in recent months it may be time to look at options for financing your acquisition of a new home. These times actually create more avenues to utilize as sellers are often more flexible if they need to sell and aren’t getting sold.
The financial component of buying is about equity. If you have cash, you will have 100 percent equity when you close. If you are getting a loan with 20 percent down, then you will have 20 percent equity at the time of closing. How you get the rest paid is where it can get tricky. If you need an 80 percent loan at 8 percent, it can get costly. You can reduce that in an assortment of ways if the Seller has equity in their property.
One way is to trade something. Over time we’ve had people put up personal property to gain equity. These include vintage automobiles, a wood boat, stock, cow/calf pairs, pure bred puppy, etc. Equity is equity. What is the value and is the seller interested in trading some of their equity for the equity you have in the personal property? If you have a vacant lot that you were going to build on some day that you could put in the mix.
This type of exchange isn’t what is known as a 1031 Exchange, it is a swap for equity. 1031 Exchanges are used to defer taxes per section 1031 of the Internal Revenue Service code and have specific criteria that must be met to be valid. Equity swaps are just that, people agreeing on value and putting the property in the “escrow pot” to make a deal together. If you get enough in the pot, you will offset the higher interest rate by having more equity in your new home.
Owner financing is also a way to utilize equities. You can have the owner carry a portion in either a first position, or even in a second position if your lender will allow you to do so. That is usually limited to a 10-20 percent amount if you are getting a loan, but it can help get you to your goal. From the seller’s perspective, they are often better off getting a reasonable interest rate from you in that case than putting the money in the bank to draw bank interest.
If you are buying a vacant lot, you might find a Home Equity Line of Credit (HELOC) a good way to go. A HELOC is a loan using your primary residence as security. Depending on the values of your home and the lot you are acquiring, you could pay cash for the lot and get a cash offer benefit. A big benefit of a HELOC is that they are quick if you have one set up.
They even give you checks to write against the line of credit in some cases. Another huge benefit is that you can deduct the interest you pay on the loan as it is secured by your primary residence. That is one benefit of the higher interest rates, that you will be paying a lot more interest, but then again there are more enjoyable ways to get tax deduction expenses.
Cash is important, but value is value and equity is equity. If you don’t have enough cash, find out what the other party is trying to do, what they like and how motivated they are. It is amazing what can happen in a challenging market when buyers and sellers want to buy and sell. Open your mind and make sure your agent’s mind is also open.
Don’t let the agent kill the deal because they haven’t experienced a difficult market when you need to solve problems in unique ways. Whether it’s a big down payment, equity in a collectible car, stocks, etc., if you’ve enough equity to offer you might even be able to assume the seller’s existing loan. Wouldn’t that be nice at 2.5 or 3 percent?
You might be able to offset the interest rate increases with your offer. At the right price you can offset a higher interest rate and enjoy your new home. Don’t be denied your new home. What’s a hurdle to a hurdler?
When it comes to choosing professionals to assist you with your Real Estate needs… Experience is Priceless! Jim Valentine, RE/MAX Gold Carson Valley, 775-781-3704. dpwtigers@hotmail.com