Builders will Buy Your Existing Home | Huntsville Alabama Homes ...

In a day in time when mortgages are becoming increasingly more difficult to obtain and as home builders are looking to find more pre-sales, builders are finding more creative ways to help their clients be able to qualify for a home loan, and in turn, buy their new home product.

Just the other day I experienced that even the most qualified A-rated credit homeowners may have an issue with obtaining financing. This is particularly a problem when owners are looking to finance a second home or if a homeowner is having an issue selling their current home and wants to (or has to) buy another one.

Most banks are now requiring up to 1 year worth (was 6 months until a month ago) of principle and interest payments (for both homes) in reserves, in addition to your 5-10% down payment and closing costs, in order to close on a second home when you already own a first home. This is a big difference when you only need 3-5% down payment when you are buying only one home.

In many places the market is down, so sellers are either forced to take a large negative hit on a sale or rent their existing home to a tenant. Taking the rental option for most means finding a rental for themselves as well, because coming up with a hefty sum to show in reserves plus down payment is not always easy.

Example: Homeowner Bob has a $300k house that is only worth $250k on the market. Not wanting to take a $50k loss and having to move results in Bob renting the property for $1800 per month to cover his principle and interest payments. He wants to buy another house 20 miles away closer to work that is the same price $300k. He would need to have $1800 per month x 2 houses x 12 months or $43,200 in cash reserves plus a $30k down payment plus $5k in closing costs equals about $77k in a bank account in order to close on the second home. Some people have it; most people don?t.

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So what else can you do?

The strategy is to buy a new home. Even better, build a custom home on a vacant lot in an established neighborhood that has high $$ per square foot comparable properties. What I have been able to find that works well is to find a good home builder that will contract to buy your existing home outright, then build you a new one, rolling any negative equity into the sale of the new home. The builder buys your home first, in exchange for closing on the new home second. You sell your house and the builder gets a sale where the numbers work for both sides. Win win.

This works well now in a slow market because building costs in such a competitive environment are at an all time low. In some areas where the market values for homes have been relatively unaffected, such as Huntsville AL, the market value minus building cost can absorb some or all of the negative equity in this kind of home transition. The detail is to ensure that this difference is equal to or greater than the negative equity expected on the sale of your existing home. The builder will help ensure this too because he knows that the home still must appraise at sale price or greater in order to close. So higher the ratio of market value to building cost, the better for you.

At the end of it all, you sell your primary home, get a new primary home, need no reserves to close (only your down payment of 3-5%), eliminate your negative equity, the builder makes a new home sale, and then breaks even and/or makes a little profit on the sale of your previous home. Everyone is happy.

If you need our help locating a builder who specializes in these kind of invest/build/flip transactions, give us a call at 256.763.0753 or email us at info@davenportagents.com

~Daniel Davenport
~Davenport Agents

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