Tips for Property Buyers
Who've Come Up Short

Add sugar. That's the figurative advice real-estate brokers and investment advisers are dispensing to their clients, both buyers and sellers. With interest rates rising, some lenders tightening their standards for borrowers and prices for good-quality assets expected to remain high, experts say real-estate investors will need to sweeten the pot to close the gap between what sellers ask for and what buyers can afford.

Some techniques being recommended are designed to keep the buyer's down-payment low. Others allow buyers and sellers to work out a way for buyers to afford a property as higher rates make conventional loans more costly. While these methods aren't new, they are being recommended more forcefully these days.

"We're going into a period where money won't be as easy to get.... Interest rates and mortgage rates ticking up is going to make financing a little tighter," says Jim Lumley, a Realtor in Amherst, Mass. "That means sometimes the sellers will have to be more flexible than they have in the past. Some of these techniques really speak to those sellers' flexibility."

Here are some of the techniques and how they work. They aren't guaranteed and sometimes can be risky for the buyer as well as the seller. In fact, sellers could end up back at the drawing board if these techniques collapse -- with properties on their hands to sell.

• Rent Assignment: The buyer promises the seller the first month's or a few months' rent from the property instead of pocketing it himself. That money can then be put toward a down payment. Timour Shafran, managing director of Capin & Associates Inc., a New York-based real-estate brokerage firm, says buyers attempting this method better be sure to have enough money after assigning the rent to cover expenses, including debt service, if there is a mortgage on the property. "You don't want to be starting off in a negative position," he says. "Only someone with very deep pockets" or who has a lot of cash reserves "should do this."



• Blanket mortgage: The buyer and seller agree for the seller to create a second mortgage, with the buyer's other properties -- either residences or investment properties -- as collateral. This may give the seller more assurance that the buyer is committed. The buyer would make payments on the second mortgage to the seller, and these payments would bridge the financing gap. "The downside is that if the property fails [with the landlord failing to generate sufficient rental income to pay the debt], the home or property [you put up as collateral] is at risk," Mr. Lumley says.



• Seller-Created Mortgage With Shorter Payoff Schedule: The seller agrees to create a mortgage, where the seller is in effect the lender. The buyer then makes the mortgage payments to the seller. This can help keep down-payment costs to a minimum. This strategy can help buyers who otherwise may not be able to afford or get a conventional loan given the rising interest rates. The key here is to make the mortgage term as short as possible -- 15 years instead of 30, for instance. "That's usually the best way to get a seller to give you financing, to make it as short a term as possible," says Mr. Shafran. Mr. Lumley cautions that buyers should make sure their rental income is sufficient to cover the mortgage, "because your payments are actually higher. When you have a 15-year-loan, you're paying a lot more money out upfront than on a 30-year loan" where the borrower could spread the payments out.

Let's Make A Deal

Another way to acquire a property with a low down payment, amid rising interest rates and a tightening of lenders' purses, is what's known as a takeover with management agreement and escrowed deed. It works like this:

• A purchase agreement is signed between the current owner, or seller, and the new investor, or buyer, including provisions that allow the new investor to gain supervisory rights to manage the property. The investor has the authority to collect all rent and pay expenses, including the current owner's mortgage payments. Any excess rents will be retained by the investor.



• An option contract is set up, in which the current owner and the investor agree on the price to be paid for the property.



• The owner signs over the deed, which is held in escrow, unrecorded, by the investor's attorney.



• Assuming the balance on the seller's mortgage loan is less than the agreed-upon selling price, a secondary mortgage is created to make up the balance. If an equity deposit is made by the investor, the secondary mortgage will be less that deposit amount.



• The option contract allows the investor to formally record the deed with mortgage payoffs at some time in the future.



• To protect the investor's equity, the seller signs over a paper-only mortgage approximating the equity in the property. This becomes valid only in the event that there is a legal judgment or some such other action against the seller, whose deed wasn't technically transferred.

This is how a MAED might be structured:

*Plus or minus that amount, depending on equity build-up and capital improvements made

Source: Jim Lumley, of Jones Town & Country Realty, Amherst, Mass.

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