With home sales down nearly 18% over the past year, it’s a good time to stay put. Just decide to fall in love with your home and your investment properties all over again. Real estate agents agree that more space, more modern conveniences and a few touches of luxury are what people want. So, now is a good time to remodel and give your house what you need to love it again. 

One idea is to create the illusion of greater size. Take unneeded doors off their hinges and stow them away. Either live without them or install glass French doors in their place. The interior of your home will immediately feel lighter and more spacious. Or, get out the sledgehammer and remove a wall. Surveys show that 40% of homeowners want only a half wall separating the kitchen from the family room; another 38% want no wall at all. 

Convert wasted space into living space, like converting an attic, garage or basement. Add an outdoor sunroom. Turn the master bath into a spa by installing his & hers sinks and separating the tub from a free-standing shower unit. Upgrade the kitchen. Nothing says luxury like a great-looking kitchen. 

In other words, love the one you’re with.

People are always asking me, “Leo, what do you think is going to happen?” Maybe it’s because I’ve been investing in residential real estate for more than three decades, maybe it’s because I’ve survived.

Well, today I can tell you that from my experience and from  reading what the experts say  - see the annual State of the Nation’s Housing 2008 which has just been released by the Joint Center for Housing Studies of Harvard University – I think that one of two things is going to happen: 1) we may be headed for a severe recession that will affect residential housing, or 2) we may skate by with only a mild recession that does not really affect housing as much as other sectors of the economy. After all, people have to live someplace.

The key is that people have to be able to afford to live someplace. Thinking back to the slump in real estate prices after the boom period between 2003 and 2005, we can learn something useful. In the boom we saw housing prices rise ahead of incomes, and because of low interest rates and low-entry mortgage loans people kept buying. But when mortgage rates started to rise in 2006, buyers began to question the wisdom of allocating so much of their budgets for shelter. Buying slowed ‘way down.

Apparently not enough people questioned that wisdom, however, because as everybody knows by now more than one million more households defaulted on their mortgages in 2007 than in 2006, when interest rates began to rise, primarily a result of  subprime mortgages. Absentee owners accounted for almost one in five loans entering foreclosure in 2006.

The bad news is that six of the last seven housing downturns preceded a recession, usually within two years, says the report. So that gives us a clue for what may happen now. In the event we only have a mild recession, the number of households is likely to grow, due to the increasing number of single people, longer life expectancy of baby boomers, and immigration. 

But first, we’ll have to watch what happens to more than one million vacant housing units for sale. Home vacancies shot up from 2.0 percent in the last quarter of 2005 to 2.8 percent in the last quarter of 2007, and until the majority of those homes are occupied, new home construction will stay flat. The national inventory of new homes will have to shrink before new construction picks up.  That’s when we will see an end to the recession in residential real estate.

One thing I’ve learned over the years is that mortgage brokers and bankers are the real tollbooths on the highway of home ownership, because they control who moves through the process of becoming a homeowner and who doesn’t. Well, whoever decided that lenders should have the power to say who gets through in order to buy a home? Right now, lenders are turning away good borrowers, which is causing a traffic jam of major proportion for sellers and buyers. Good people need to sell and other good people need to buy, but the people in the position of power won’t let many get on with their transaction. So, what to do?

Fortunately, there is a solution. It’s not new and it’s not fancy. It’s called seller financing. Real estate agents need to tell their sellers and buyers that today, especially in this risk-adverse lending climate, seller financing may be an important option. The marketplace is littered with dead deals that could have been revived by a savvy real estate agent suggesting seller financing up-front. Sellers rely on their agents to tell them what is good for them, what is “normal”. These days, seller financing is normal.

Let’s face it, lenders are in the business to make money. Lots of lenders, perhaps most lenders are losing money today. So institutions are not going to take much of a risk any more.

Here are a couple examples I heard about lately:

The first deal was for an investor putting $50,000 down on a $72,000 investment property. He was denied by three lenders for not showing enough financial information. When the angry seller called his agent to vent, the buyer’s agent offered to hammer out a deal using seller financing, an idea that was never mentioned as an option to the seller by his own agent.

The second deal was for an AAA credit client who wanted to buy a second property. That deal was killed after weeks of delays by the lender after using HOA financials as an excuse. The buyer’s agent went to the listing agent and offered seller financing as an option.

Even if you don’t have experience creating or understanding seller financing documentation, bring up the idea. All it takes is a willing seller and buyer and a good real estate attorney to structure the terms and prepare the contract. This is where a good real estate attorney truly shines. Use one. Pay him or her for services rendered and get on with your transaction. It’s worth it!

And here’s why:

1. Immediate cash upfront from buyer to seller (negotiate 3%, 10%, 20%, 30%, 50% … )
2. Negotiate terms that will benefit both seller and buyer goals
3. Tiered interest rate options
4. Negotiate monthly, quarterly, yearly payments
5. Negotiate interim (additional) payments to seller quarterly, if long term
6. Obtain buyer asset(s) to sweeten the deal
7. Explain seller default options

Don’t overlook the fact that buyers will save a bundle on closing costs associated with working with a lender and all the many associated fees. Eliminating most the cost of obtaining financing can actually help a buyer qualify who might not have qualified before.

Of course, seller financing isn’t risk free, but nothing is truly risk free. Sellers take a chance that their buyers will default on mortgage payments, it’s true. But this issue can be easily addressed by creating a short-term seller financing agreement that gives the buyer just enough time to save up more down payment cash and to liquidate other assets to use as down payment money, all of which generally means the buyer’s debt to income ratio will improve as well. That ratio is key in any buyer obtaining financing.

Want a deal you can take to the bank? Want to get through the tollbooth and get on with your real estate transaction? Then anticipate the need for seller financing and prepare your sellers, help them assess their financial position and ability to offer seller financing, to consider what they will need from a buyer up-front and what they will need on a monthly basis.  This preparation can mean the difference between a live deal and a dead deal for everybody.