With banks tightening the money supply one principal broker noticed an increase in the number of offers he was signing off on where buyers were requesting seller financing. As a result of the observation decided it would be interesting to look at the data and determine the number of units on the market offering seller assistance as an option versus the number of units sold where it actually was a part of the terms.
A recent review of the Honolulu Real Estate Market revealed some interesting results. The follow table is a collection of data taken from March 24, 2009 to March 25 2010. It is a breakdown of two categories Condos /Townhouse and Single Family Homes. It shows the number of units available by month of those sellers willing to provide financing as an option to enhance the terms and the condition of the sale. The table also shows the number of transactions by month where buyers actually took advantage of this opportunity.
The data in the MLS search show three types of seller financing. The Agreement of Sale is when the seller retains the title of the property in their name. In this case, the buyer promises to pay the seller an amount certain. In turn seller promises to keep the property clear of any additional liens other than those at the time of sale by paying the existing mortgage, taxes, HOA dues and any other fees that may encumber the property. This approach is dicey to the buyer because if the seller decides to forego any of these obligations it puts the property at risk.
Purchase Money Mortgage is the most preferred method for conducting this type of transaction. In this case the title is transferred to the buyer, who then gives the seller a note as a promise to pay. This approach the buyer is responsible for paying the monthly lien holders if any and all monthly fees.
The Seller Financing category is a little nebulous. The best way to describe it perhaps is to think of it as a catchall or a combination or variation of the above two. The other caveat worth noting, banks do not like sellers financing their own deals and often have a “call on demand” clause written into the note in the event of its occurrence. Such clauses authorize the lender to require the debt to be paid in full when activated. If the property is mortgage free than this is not an issue. On the other hand in the Agreement of Sale approach the property does not change hands and often the lien holder is kept in the dark about the transaction.
In this current real estate market where the lending criteria for banks are very restricted the conventional thinking is there would be a rise in transaction where sellers would be more incline to offer financing as an option to purchase and buyers would be equally interested in accepting. The above graph show over the pass year there has been a modest increase in the trend of sellers offering such terms but buyers have not responded in kind. The blue line shows the number of townhouses and condos on the market per month that offer seller financing as a possible term for purchasing. The yellow line refers to single family homes on the market with the same type of terms. The light blue line shows the number of buyers of single family home who actually took advantage of the opportunity. The mauve line is the number of buyers of condos/townhouses who opted for seller financing.
The conclusion, there is an increase in sellers are offering financing. The option existed more frequently in the condo/townhouse market, however, buyers were more inclined to take advantage of seller financing in the SFH market. It was also noted some of the data revealed buyers as a part of their offer to purchase are asking for seller financing even if the option was not offered upfront. These offers are also a part of the data. In any event out of all the single family homes offering sellers financing that sold during the time period of concern only 16.18% actually closed using this option. By the same token all condos and townhouse offering sellers financing that sold during same period only 9.52% actually closed using the option. To put this in perspective, this translates to 0.385% of SFH sold in the same time period and 0.207% of condos and townhouses.
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