In a slow housing market with tight credit, seller financing can be a popular way to finance a house. Some seller financing plans are worse than others, however. Yesterday, ABC15 News in Phoenix did a feature on seller financing which made it sound like it could be a good deal. When I checked out the website of the company they featured, Arizona Sellers Financing, I was pretty horrified at their terms. Check this out from their “20% Down” program:
You need a 20% down payment for homes priced $100,000 and higher. Homes priced less than $100,000 are available with slightly higher down payment and interest rate requirements.
We purchase the home you select then sell to you with a 20% mark-up (mark-up is based on our purchase price plus our cost to purchase).
For example: We buy for $197,000+$3,000 in costs = $200,000; you buy from us for $240,000 ($200,000 base price + 20% mark-up).
In spite of these hefty add-ons, here’s what their website claims about their costs:
Buyers can now buy homes without bank qualifying at current market values – almost unheard in the seller financing arena. While most sellers who offer seller financing are asking tens of thousands more than fair market value Arizona Seller Financing sells for current market value every time.
Arizona Seller Financing is enabling buyers who cannot qualify for traditional bank financing (or don’t want to pay the high costs of obtaining bank financing) with the ability to own a home IMMEDIATELY.
So selling you a $197K house for $240K is selling you a home at “fair market value”? Paying $43K in upfront costs on this house beats “the high costs of obtaining bank financing”? Really?
To recap, they pay market price for a house, tack on $3000 in “costs”, mark the house up 20% and sell it to you. That’s kind of pricey, but wait until you see what kind of loan this gets you:
- 20% down payment from you
- We provide financing at 7.99% interest;
- 30 year fixed with 7 year balloon
That means that after seven years, you are going to have to go to a lender to get bank financing anyway. If the market remains relatively flat or depreciates, [either of which are likely, given the current state of the market.] you’ll be trying to finance $197K on a home you for which you paid $240K . On the other hand, if you were to rent that $197K home for the next seven years and put that $43K in CDs, you’d be able to put a serious downpayment down on that $197K house and have a much smaller mortgage payment and a lot more equity.
Patience is a virtue. Anyone taking advantage of a program like this is paying a huge premium for the privilege of owning a home today. Once more I ask a slightly different question that many realtors ask:
Why throw away money on a mortgage when you can rent?