Those of you old enough to remember the high interest rates of the late 1970's, which lasted throughout the 1980's, may recall that quite a few real estate gurus made their name during this period with books on creative financing strategies for buying real estate.
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According to the official history of interest rates, the official prime interest rate on December 19, 1980 was 21.5 percent! (this is the all time record)
I bet most folks today don't even realize that interest rates for those with the best credit scores could actually go that high, but they did back then. Given that interest rates are a fundamental factor in real estate financing, the market response to such a high interest rate was to look for alternative ways to finance a home purchase. This was the dawn of the original era of creative finance.
It would be July 2 of 1992 before interest rates would again be pegged at 'only' 6 percent. Even though this rate was destined to climb back to levels as high as 9 percent before the new millennium began, new government policies designed to increase home ownership were making it much easier to qualify for a mortgage, and the money floodgates began to open wide. As a result creative finance strategies were all but forgotten by the early 2000's when easy money dominated the housing market until the crash in 2008.
Today we find ourselves with a totally different set of fundamentals, and in spite of the low interest rates, most buyers can't qualify for a mortgage. Today the official prime rate is 3.25 percent. The last time the prime rate was at 3.25 percent or lower was on August 4, 1955. But in 1955 the U.S. was the number one manufacturing powerhouse in the world and civilian unemployment was 4.4 percent compared to 8.9 percent today.
Our money is not the same either. Today it takes $8.55 dollars to equal the purchasing power of $1 in 1955. Since 1955 the cumulative inflation rate is 754.9 percent. At the same time, income growth is virtually flat for the vast majority of the population, according to census data.
So we are in a situation today where unemployment is near all time highs while housing prices, though significantly lower over the past four years are still above general affordability levels, and the vast majority of the public has debt or income issues that are keeping them from qualifying for a home mortgage through traditional channels.
Even though the fundamentals are drastically different from the early 1980's, I believe that today's fundamentals are going to drive a new era of creative financing strategies for both buyers and sellers.
For buyers, the need to avoid qualifying is obvious. Home sales, though up in recent months, are still dragging the bottom compared to the boom years. I don't believe that there is a shortage of interested buyers, but the tight credit qualifying standards in place today are simply forcing many to rent instead.
For sellers, issues with appraisals, high foreclosure rates in the neighborhood and/or reduced home values have been a deterrent that has forced many home owners to keep a home that they would rather sell. I've seen hundreds of homes sitting on the market for months or even years waiting for the stars to align so that they can sell their property at a price that is satisfactory to them.
The viable solution to today's market fundamentals is creative financing strategies for buyers and sellers. Buyers who want a home but cannot qualify through traditional channels are a great target for sellers who want to sell but can't get an offer from a buyer who can get approved for a new loan.
Creative financing strategies include things like 'Lease-Options', 'Wrap-Arounds', 'Subject to the existing mortgage', 'contract for deed', 'taking back a note', or outright seller financing where a seller owns the property free and clear.
Personally I LOVE seller financing. For sellers it's an opportunity to be your own bank and pocket the tens of thousands of dollars in interest that the mortgage company would otherwise get. And in today's era of very low interest rates on savings accounts, financing a home can be a great way for a seller to create a long term income stream that pays much better than a savings account.
Buyers can also use funds from IRA's and other retirement accounts to fund a purchase. Sellers can improve their return on retirement savings by using the money to buy cheap foreclosures that can be resold to an owner-occupant buyer with seller financing, creating a much better return on your investment than a savings account will yield today.
It's always possible to buy or sell a home when you know how to use creative strategies to get around the traditional system and it's vast maze of rules and regulations. If you want a home of your own, or you need to sell a home that's been waiting for a buyer, it's time to get creative. It's likely that the housing market will take years to recover and return to it's pre-2008 era of easy qualifying, if it ever does. Waiting for things to improve could mean waiting for many years to come.
Creative finance has been primarily the territory of real estate investors, but when you think about it, anyone who wants to buy or sell a home IS a real estate investor because no one purchases or sells a home with the intention of losing money.
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Donna S. Robinson is a real estate market analyst, investor, coach, author and speaker, with 17 years in the real estate industry. Follow her on twitter at donnaconsults and read her blog at www.RealtyBizConsulting.com
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