Broker Toolbox

Despite low inventory levels, it's still a buyer's market out there. Thus, most buyers active in the current market are those who can buy with cash, or who have large enough down payments to better manage higher financing costs. Since there are fewer buyers overall, sellers are competing for them by lowering prices, which most of them are understandably loath to do. So what other options do they have?

One increasingly common practice is rate buy-downs, which entail sellers issuing a credit so their buyers can "purchase" reduced interest rates, either for a limited period or permanently.

"We've seen an increase in sellers providing concessions to buyers in order to pay for interest rate buy-downs," explains Gil Ledany, Senior Loan Officer with Guaranteed Rate, "Usually, a seller can influence a borrower's rate either short or long term by a considerable amount, making the payment much more affordable without dropping the sales price much."

Also, since buy-downs do not affect the actual sale price, they increase the likelihood that transactions will be approved by coop boards, who have been known to reject deals if they decide that the contract price is so low it will lower the value of future sales. In the current market, it's not unusual to see rate buy-downs used in combination with proper pricing (or price concessions) to get the deal signed.

Still rare but poking its head out a little more often these days is the notion of seller-financing. Seller-financing essentially allows sellers to be the bank on their own sale. This arrangement may offer the buyer a below-market interest rate, say 5%, which in the current rate environment could save them 20-25% per month in financing costs.

In return, the seller gets to sell their property now rather than cutting their price more than they can stomach or waiting months or years for the market to come around. In addition, that 5% interest might equal or even surpass the rent that sellers could get for their apartments if they were to simply rent them out. That math starts to look pretty compelling when you consider that the seller would no longer need to pay common charges and taxes, nor face other forms of personal and financial liability, since they would no longer own the property (unlike a landlord).

The risk for the buyers is that interest rates could remain high, so when this seller-financing agreement ends (in three or five years, etc., as the case may be), they end up facing the same type of high interest they were trying to avoid in the first place. “For sellers,” explains Matthew Melnick, real estate attorney with Konner Gershburg Melnick Darouvar, “the risk is that the buyers default and end up foreclosing on the property, which could entail a lengthy and expensive legal process.” However, the seller in such a situation would still keep the non-financed portion of the purchase price paid at closing and would be “made whole” through the legal system…eventually. So as in any real estate transaction, you’ll want to have your agent vet the prospective buyers very well before entering into any agreement. There may also be tax implications – positive or negative – to acting as seller-lender, so be sure to consult a tax professional, and of course a real estate attorney, before you commit to seller-financing.