If you had a bank that credited your account each morning with $86,000 that carried over no balance from day to day - that allowed you to keep no cash in your account...and every evening cancelled whatever part of the amount you had failed to use during the day --- what would you do? Draw out every cent, of course! Well, you do have such a bank - its name is 'time.' Every morning it credits you with 86,000 seconds ... every night it rules off as lost whatever of this you have failed to invest to good purposes. It carries no balance... it allows no overdrafts. Each day it opens a new account for you. If you fail to use the day's deposit, the loss is yours. There is no going back. There is no drawing against tomorrow. You must live in the present on today's deposit.

CREATIVE FINANCING

One of my challenges as a real estate instructor is to get students minds "out of the box." I always seem to be trying to stretch them a little bit. The latest finance class is a case in point. Many people have become complacent with the lower interest rates we are enjoying. When I brought up the subject of "temporary buy-downs" everyone in the class wanted to challenge the idea. That was until they were able to see buy-downs as valuable tools which open the market to more buyers and create satisfied sellers. A thorough knowledge of buy-downs and discount point is essential to sellers and agents. Unfortunately most people do not understand how they are calculated and are reluctant to use them in the appropriate sales situation and as a result many sales are lost unnecessarily.

In any interest rate environment, there may be significant objections to the monthly payments associated with traditional fixed rate financing. First time and move up buyers are typically looking at a much larger monthly expenditure than they have been used to paying. While adjustable rate mortgages may provide for a lower monthly payment, there is also legitimate fear of future rate increases associated with adjustable rate financing. Either objection can prevent a sale. The temporary or escrow buy-down may answer both objections and pave the way to a sale and closing.

A buy-down is money that is paid by someone (seller, builder, employer, buyer) to a lender in return for a lower interest rate and monthly payment. This payment, in dollars or discount points, lowers the buyer's payments either for the entire mortgage term (permanent buy-down) or for a lesser period of time, usually 1-3 years (temporary or escrow buy-down.) The obvious advantage to this process is that the market for the property is immediately broadened, because more people can qualify for a loan.

Perhaps you, as an owner, have had your home on the market for a while and have decided that maybe the thing to do is to lower the price by ten thousand dollars. If you think about it you'll see that the lowering of price isn't going to add more prospects to your market. The technique I'm going to demonstrate will generate significantly more interest.

At this writing the interest rate on a 30 year fixed loan is 6.75%. We're going to do a 3-2-1 buy-down of that rate. This means the interest rate for the first year is 3.75%, the second year is 4.75%, the third year is 5.75% and years 4-30 are 6.75%. For this example let's assume the property was originally on the market for $170,000. The seller is willing to drop the price to $160,000. Instead, we continue to market the home for $170,000 and offer this package. Down payment is 20% or $34,000. The new loan amount will be $136,000. The monthly payment for the first year will be $628; the second year the payments are $709.92 per month and the third year they are $794.24 each month. Each year thereafter the monthly payments are fixed at $882.64.

Right away you can see that this significantly enlarges the possible range of purchasers for the property. The young family that has the down-payment, possibly from a family gift but can't qualify for a payment of $882 may easily fit a payment of $628. Let your imagination run with this one.

What does it cost the seller? Remember he was willing to drop his price $10,000! The cost of the buy-down in this case is $6189.12. The seller saves $3810.88. The buyer who would never have qualified for the original (uncreative) deal has a great property. The values in the neighborhood stay up so the neighbors are delighted. Everybody is happy. Your next question is probably, "Will the lenders go along with this." All the lenders I talk to say yes.

Call me if you want a copy of the exercise sheet we use in class so that you can do your own calculations. It's fun, it's creative, and guess what - you're out of the box.