I recently received a question via email asking whether some of the principles discussed in this Real Estate Investing Guide can be applied to sales and purchases of a primary residence.  The simple answers are, “yes you can” and “yes you should.”  I’ve included the original email as well as my response, but have removed personally identifiable information in order to protect the innocent.

Hi Augie …My question may be too involved (I may not be able to provide enough details for more than a general answer), but let me give it a whirl. I read two of your articles: (a) What Everyone Needs to Know to Manage in This Market, (b) Reality Check for Real Estate Agents, Brokers and Investors. Very good articles, but the way! Perhaps a dumb question, but could these same principles be applied to a personal residence? Briefly, we have been trying to sell our home for about 6 months. We would like a bit larger home on acreage. Your articles intrigued me. I don’t want to do anything foolish from a financial perspective, but have often wondered if there isn’t a creative (yet sound) way of doing things to make this transition. I see the value in applying this to investments, but wonder how this would apply to a home that you plan to live in for the long term (at least that is the intent).

Thank you for any help or advice you can provide.

Your Reader

Dear Reader-

Based on the limited information you provided, it sounds as though you currently own your home and are looking to trade up in terms of living space and acreage.  The market is slow and you’ve been trying to sell for 6 months.  This can be a particularly good time to do this because as markets around the country recover, higher prices/valued properties will rise by the same general percentage.  The good news is that that percentage will represent more dollars.  As an example, when a market rises over time by 10 percent, a house originally valued at $100,000 will increase in value by $10,000 while a house originally valued at $400,000 will increase by $40,000 with no more effort.  It is just the rising tide of appreciation raising all boats.

If I were in your current situation, I’d likely offer my home for sale with terms such as a some reasonable percentage (I usually use 3 to 5%) down with a reasonable monthly rental payment (preferably enough to cover your current expenses).  This is basically a lease with an option to buy, also known as lease purchasing a home.  I’d give the buyer up to 3 years to find their own financing and cash me out.  There is a home study course available www.CreatingWealthUSA.com, by the way.

You could also structure the transaction as a lease purchase whereby you’d rent the property until the purchase is completed at a predetermined date. In either case we make the Option Fee or Down Payment (whichever applies) non-refundable.  If someone comes along with a large down payment (say 20%) you might be willing to sell them the property using a wrap around mortgage where they will pay you monthly and you will continue making payments on any underlying mortgage.  Please be sure to use a knowledgeable real estate attorney or escrow agent to close the transaction.  You might also consult your tax advisor regarding any income tax considerations.  Additionally, in these examples it is your responsibility to pre-screen the prospective buyer just like a bank would.  Do they have the financial mean to make the payments?  How is their credit, does it need repair in order to qualify for a mortgage in the next 12 to 36 months?

As far as buying a new property, you could advertise for a swap in your local paper.  “Situation wanted, looking for  3 to 10 acres in exchange for immaculate __ bedroom/ ___ bath home in lovely neighborhood.  Willing to discuss terms to satisfy both parties.” Who knows, you might attract someone who’s been trying to sell a house with acreage for 6 months without any luck.  You just have to find each other.  You might also look for a lease option of your own with a motivated seller.  If you do this, make your term longer on the property you’re buying than the one you are selling.  Check with your local REIA (Real Estate Investment Association), sometimes their members have wholesale properties, owner financing deals and lease option properties available.  If you work directly with a seller than the sky is the limit in terms of creativity.  Assuming you have equity in your current home, you might be able to use it as your down payment or option fee on the new property by giving them a note secured by that equity payable when your buyer exercises their option. This way you don’t even have to come out of pocket for the option fee or down payment (depending on the transaction you create). Whatever terms you both agree to will be what makes your deal work.  Keep an eye out for probate deals, free and clear properties and other generally motivated sellers.  They are the best candidates for making creative deals work.

What do you think?  Would you structure the purchase of your primary residence like a real estate investment?