WASHINGTON -- Serious sellers in soft real estate markets have begun using highly creative -- and sometimes high-risk -- techniques to bring timid buyers to the settlement table.
Among the unconventional sales approaches now popping up in major markets are two that were virtually unheard of 12 months ago: Guarantees against price deflation and multiparty "in-search-of" (ISO) house trades.
Deflation guarantees are intended to remove buyers' legitimate fears about the future perils of a recessionary economy. In markets where home prices are either declining or have the potential to do so, many purchasers have headed for the sidelines this fall.
They make a good case: Why should we buy now if real estate values haven't bottomed out? Even if a house is well-priced today, couldn't it slip in value during the coming year? So why not wait?
To handle that concern, aggressive sellers have begun inventing creative cushions designed to protect their buyers from any hard landings. Example: Ernest Peterson owns a 17-year-old, 3,500-square-foot home on a wooded 5 1/2 -acre site in Great Falls, Va. The property is assessed for local tax purposes at $657,000. Rather than have the house sit unsold during the coldest months of the real estate year, Peterson has just added a deflation guarantee. Meet his below-assessed-value price of $624,000, and Peterson will provide a qualified buyer with an escrowed guarantee to cover up to a 10 percent decline in the appraised value of the house during the next 24 months.
The deal works like this: As part of the normal process of applying for mortgage financing, prospective buyers of Peterson's house will obtain an appraisal from an independent appraiser chosen by the bank or S&L making the loan.
At settlement, Peterson will provide the buyer with a secured note, to be held in escrow by a third-party trustee, that essentially guarantees the buyer against any diminution in appraised value, up to $62,400, or 10 percent of the selling price.
The buyer must agree to use the same appraiser as the bank used for the original sale. Peterson explains that this is essential to "eliminate any problems with selection" of comparables and other appraisal factors. If, after two years, the appraisal reveals a net decline in value, the trustee will be authorized to cash in the note for the amount of the net loss and pay it to the homebuyer. But if, as Peterson hopes, the house retains its value or appreciates, the guarantee will be extinguished at the 24-month deadline.
The risks for both sides are nothing to sneeze at. The buyer needs to make certain the secured note is as solid as represented. What is the collateral? If it's real estate, how accurately has it been appraised? What connections, if any, exist between the seller, trustee, appraiser or lender? The risk for the seller is even more obvious: He might indeed have to fork over the money.
Other creative techniques surfacing with even greater frequency: Two-party house swaps, multiparty exchanges, and houses as down payments for move-up buyers.
Gary Case, a Remax real estate agent in Prince George's County, represents sellers actively "in search of" (ISO) real estate swap partners. An example of one deal currently being negotiated: The seller of a $163,000 home swaps for a $70,000 condo, treating the condo owner's equity as the down payment for his larger property.
In another case, the owners of a $240,000 single-family home moved to North Carolina. They are in search of a town-house owner with a relatively low equity who'll swap for their home. The North Carolina couple will then rent out the town-house indefinitely.
Although the existing financing on all four houses involved here creates complications in the deals, the net effect at the end of
both transactions will be true exchanges, true equity swaps, according to Case.
Note that house swapping like this has no legal or tax connection with "1031" exchanging. Under Section 1031 of the Internal Revenue Code, like-kind business or investment property can be exchanged tax-free. Principal residences cannot.
Some soft-market home-swapping transactions involve chains of owners, assembled by real estate agents. Sydelle Corwin of Long & Foster Realtors in suburban Maryland is assembling a four-party swap. "If the seller of house 'A' doesn't want the house owned by seller 'B,' " Corwin explains, "then you've got to find a seller with a house ['C'] and maybe even a fourth house ['D'] before everybody ends up with what they want."
A word of caution on deflation guarantees and house trades: Unless you're a seasoned real estate pro, don't attempt a deal without professional assistance. With help in hand, though, plunge ahead.
Creative techniques may be the smartest ways to get into -- or out of -- a house this winter.