REMEMBER WHEN YOU USED TO TRADE snacks at lunchtime in elementary school. You would trade your box of animal crackers for a Twinkie or trade a Moon Pie for a bag of chips. Of course, everyone always wanted the coveted pie with fruit filling. Trades for a pie became complex and depended greatly on negotiation skills. To attain a fruit filled pie a minimum of two snacks or a snack and half of a worthy sandwich, such as peanut butter and jelly, were needed to even open negotiations. Oddly enough, those same skills needed to get that delicious fruit-filled pie are the same skills needed in real estate trading.
The idea of trading one good for another has been around since the dawn of humankind. It was our ability to think, settle, grow crops and trade that helped propel and keep us at the top of the food chain. However, the idea of trading real estate seems foreign and odd to many individuals.
As many people are finding out,today is not the best time to sell a home in most areas around the country. Nevertheless, sometimes people find they need to sell their home due to job relocation or family needs, such as a new child on the way. The problem is that when a home’s value is depressed finding a buyer is difficult.Buyers that are interested want to “grind” or lower the price, usually to something much lower than the seller anticipated. It is in this type of situation where a real estate trade is beneficial.
Although real estate trading has been around for many years and used in commercial real estate, it has only recently become a viable option for homeowners as real estate markets continue to soften around the country. Through the advent of the Internet and such sites as craiglist.org,homeowners are beginning to find others looking to trade their home.
Real estate trades can be setup several different ways, with one commonality — they are contingent on a simultaneous closing. Unfortunately, trading your home for another home in another city is not as easy as trading a bag of Doritos for a Tasty Cake cupcake. A real estate trade is an exchange and both parties need equity in their respective pieces of real estate to complete the closing. Since the closing happens simultaneously, the buyer and seller have to sell their real estate first, and then buy the new piece of real estate. The equity in the sale of the property is used to cover the down payment and closing costs of the purchase or the real estate being traded. Below is a real world scenario for clarity.
Bob decides he is going to leave Los Angeles and move to the east coast for his retirement. Virginia is a state Bob loves and decides he wants to buy a home in northern Virginia. Frank gets a job in Los Angeles and needs to move. Frank lives in northern Virginia where Bob wants to move. After evaluating the real estate market Bob and Frank decide they are going to trade their homes.Bob and Frank find each other on craigslist.org.They each fly out to one another’s homes to make sure the properties are suitable for their needs. To keep things fair, Bob and Frank each hire a real estate appraiser on top of the appraiser that is hired from the banks that are going to finance the purchase. Bob’s Los Angeles home comes in at a value of $1,000,0000,while Frank’s home values at $950,000. Each bank is willing to finance 80% of the purchase price for each individual and is fine with a simultaneous closing. The men enter into escrow and wait for the banks to set up the financing.
Forty-five days later, both men go to escrow to sign loan documents. At closing, Frank brings an additional $50,000 on top of closing costs to cover the difference in value from the properties since his home was worth $50,000 less. Both deals close together and they now own each other’s homes.
The complexity of real estate trading comes in the value of the real estate and the other party’s motivation. Some individuals are willing to walk away from equity to get out of a specific location. Others are willing to pay more to get into a good location. Every person has their own reason for trading. Another caveat is financing. Most lenders want to see at least a 20 percent down payment. This becomes a problem for people with little or no equity in their homes.
Real estate trading has been around for many years. Real estate trades can include multiple properties in multiple states between multiple people. Some real estate agents and brokers specialize in the real estate trading niche. However complex a real estate trade is, it all boils down to the individuals making the trade, what real estate they are trading and what their motivation is to trade. It is up to the individuals making the trade to determine if the trade is worth making. All the variables involved in real estate trades — such as the owner’s motivation and value of the real estate traded — are similar to the variables involved in the elementary lunchtime coup of your life. You determined that half a peanut butter, marshmallow and honey sandwich, 10 Pringles and tomorrow’s mystery snack were worth the price of that wonderful apple filled pie your mom would never get you. Ultimately, you have to determine if all the variables meet your specific need for real estate trading.
Originally published in the Santa Monica Daily Press print edition on July 30, 2008. Read the original PDF.