Can the builder take my home in on trade?

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Can the builder take my home in on trade?

This frequently asked question has become increasingly difficult to answer with a simple “yes” or “no”. New lending guidelines and adverse market conditions have made it almost impossible to trade homes with a builder or seller.Here are a few of the guidelines set forth by a combination of government agencies, residential and commercial lending regulations and Cowherd Construction company policy:

The buyer’s home must be a minimum of $70,000 less in value than the home purchased (called an exchange spread). For example: if the buyer purchases a home for $170,000, their home may not exceed $100,000 in value.

The buyer’s lender will require an appraisal on the home they are trading (as a loan condition) for the new home purchase at the buyer’s expense. In order for the loan on the new home to be underwritten, appraised value of their existing home must be equal to or greater than the purchase price builder/seller is willing to pay.

If the buyer’s current home appraisal value is below the purchase price, both contracts are nullified. This new lending guideline prevents buyers from moving a negative equity status from the current property to a new property.

The lender for the builder/seller must also approve the trade transaction. The price, location, condition and marketability of buyer’s home is closely scrutinized to determine the probability and estimated time it would take the builder/seller to re-sell the property. The estimated monthly holding costs are factored in when approving/denying financing on a trade.

The builder/seller must assess the risk factor of taking a buyer’s home on trade vs. selling their own home in the same time period.

Understanding real estate commission, closing costs and expenses on trades is best illustrated in the following example:

$100,000 – Builder/seller establishes offer price of buyer’s home based upon a current CMA (Comparative Market Analysis) or appraisal. Ie. $100,000.

($12,800) Estimated Expenses – Builder/seller will have to pay real estate commission when they sell the house to the next buyer (est. $6,000), pay closing costs and appraisals on two real estate transactions (est. $2000 ea.), pay for home inspection ($375) and make repairs to the home in order to sell est. ($1425) for re-paint, carpet cleaned, repairs per home inspection report. Holding costs – if average days on market is 60 days, then two months of interest, utilities, expense is deducted. Est. $1,000

$87,200 Offer to purchase home from buyer.

The buyer must not owe more than $87,200 on their current mortgage. If the buyer owes (for example) $95,000, the buyer must bring the deficit of $7,800 to the closing in order to pay off the difference. Buyer will not be allowed to “roll in” negative equity by adding to the sales price of the new home.

The out of pocket expense in this scenario does not include the buyer’s portion of their closing costs on the sale and purchase of their home. Per lending regulations, the builder/seller is not allowed to raise the price of his home in order to pay closing costs on the buyer’s behalf unless the appraisal indicates the value is established.

Why are the regulations so stringent?

In the past five years, our country has seen an unprecedented number of foreclosures and short sales. Many buyers were exchanging their upside down (negative equity) position in their existing home for a larger home. If a house was worth $100,000, the builder/seller would offer them $115,000 to cover their loss and mortgage balance. In exchange, the buyer would offer the builder/seller $240,000 on a home worth $225,000, typically on a low interest 3 -5 year ARM to be able to afford the higher mortgage. When the real estate bubble burst, people were in homes they could not afford and in a market that could not hold values. A domino effect took place, which forced the regulations and guidelines to be put into place.

Additional Financing Hurdles

Recently, Department of Housing and Urban Development (HUD) has put further restrictions on the sale of recently exchanged properties. When a builder/seller purchases a buyer’s home on trade, government backed loans such as FHA, VA and USDA require the builder/seller to hold the property for a minimum period of time prior to selling the home to a future buyer, which further adds to the builder’s holding costs and reduces the buyer’s net price offered on a trade transaction. If a property must be held for a minimum of 180 days, the holding costs could exceed $6,ooo-$10,000 depending on the interest accrued.

Given the current lending guidelines and government restrictions, it is not advantageous for the buyer or the builder/seller to enter into a trade agreement. If possible, buyers should always sell their home with the assistance of a real estate professional. With proper guidance on pricing and marketing, it is possible to sell with the option of buying an inventory home or building a custom home.

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