Expert: Dick Dennis - 10/15/2008

Question
QUESTION: Hello, you seem like a very knowledgeable person to ask a question of this sort as I am stymied!  Here goes...  I want to purchase a home worth 140K from an acquaintance.  He would like to purchase a different home from me.  Appraised at 115K. We would both like to "trade equity" equally with each other.  I could buy his home for 80K and he could buy mine for 50K. Do you possible know how I would structure this?  He is not a relative, so I don't think I could do an equity gift.  Any ideas you could enlighten me with?  Thank you, Julie

ANSWER: I am assuming, Julie, that you both have no mortgages on your respective properties. Just to remind you, equity means value less any liens or mortgages. Since you refer to one house as having $80K value, I am assuming that means $80K equity, no mortgages or liens. The same for the other house at $50K.

That means if you were going to exchange houses, you would owe him $30K. Therefore, you must execute a mortgage in the amount of $30K. That way you would be exchanging $50K equities.

That $30K mortgage could be paid (he would carry it back) $179.87 per month including 6% interest. In 3 years you would owe him $28,825. In 5 years, you would owe $27,916. In 10 years, you would owe $25,105. Or you can let it go until you pay it off in 30 years.

I wish you well.

Dick Dennis        Dick@DickDennis.com

---------- FOLLOW-UP ----------

QUESTION: Thank you for your prompt reply.  My apologies as to my lack of more clarity in my quandary.  My house for sale is worth 115k, I do owe a mortgage of 50k.  His house is worth 140k.  If we just mutually reduced our respective selling prices to the tune of approx. 60k how could I convince a lender of this? If I subtract 60, I would only need a loan of 80k.  I still want to be able to show that I'm contributing my 60k equity.

ANSWER: Sorry, Julie, but you left out what kind of loan he has on HIS house. Little by little we are getting there, Julie. So far you have an equity of $65K ($115K minus $50K). I do not know what he has in equity, unless he owns it free and clear. When you answer this question, I can give you the rest of the answer.

Dick Dennis     Dick@DickDennis.com

---------- FOLLOW-UP ----------

QUESTION: Yes, this is one draw back of not being able to converse in person.  Thank you for your time on this.  The reason I left out his balance he owes (40k) is that I didn't think it made a difference in this situation.  Instead of him purchasing my home for the full 115k I could get for it, he is reducing my purchase price of his mobile by  60k.  He could feasibly get 140k for his property.  But If we do this equity trade, I would only have to owe him 80k.  I'm giving him my 60k in a way and he's giving me 60k off the price of his property.  The reason I'm asking this is that I'm finding it very difficult to find funding for an old mobile.  It is attached to the land with a full basement.  It also has two beautiful acres In an area of brand new upscale homes. But it is still an older mobile. I need to obtain 80k to pay him off and since it isn't real cash to put down on an actual mortgage I don't know a way to show that I would in truth have 60k actually invested if we do this swap.  It would be easier to just sell my Dayton house for 115k and put 60k cash down on this property, but he wants to be able to purchase my house at a lower price because it is easier for him to obtain financing so he could pay off the 50k balance on it this way.  He's not a relative, so I don't believe we can structure this as mutual "gift equity".  I've already been in the mobile for a year now and am determined to find a way to keep it.  I've even considered proposing that we draw up a private contract for the mobile.  Then he could go sell it later, correct?  I don't know who's reputable with note buying or how to structure it properly.  It still would leave a dilmma of showing on the note that I really would have 60k invested in the property from the equity trade.  Your thoughts please.  If I haven't confused you terribly yet! :)

Answer
After I read that you are talking about getting a mobile home, I stopped reading, Julie. In this real estate market you have such a huge choice of excellent homes even if most of them are foreclosures. But even more so, later on, if you ever try to sell that mobile home you are going to have all kinds of headaches. You already received a taste of it. Mobile homes are inheritantly hard properties to sell and I am sure the other guy is ecstatic that he has someone on the hook to buy it. In a down market, you as a buyer, are in the catbird seat. Take that $60,000 you say you have and use it as a down payment on a fine house. There's a reason why banks won't lend on mobile homes, especially old ones: they have very little value! And ALL mobile homes go down in value, not up like real estate. That mobile home may not be in a wrong area, but have you noticed that whenever there are hurricanes, tornadoes, earthquakes, fires, mobile homes get it first and the worst. That's another reason why banks won't lend. I do wish you well, Julie.

Dick Dennis