Complex Real Estate Transactions: Swapping Homes

Summary: Talk about complex real estate transactions! A reader is considering selling a home to a buyer with bad credit and a nice home. Is there a way for them to simply swap homes and avoid real estate commissions?

Q. I have a home valued at about $390,000, but I’d like to move to a better area.

We found a buyer who has credit problems and also a problem with the property taxes on a home he inherited from his parents. In fact, his credit is so bad, he can’t even borrow money to pay the $6,000 he owes in property taxes. His property is distressed, but it is located in a nice area.

We think the value of his home is about $350,000. We owe $158,000 on our mortgage. We would like to know how we can buy his home and he could buy our home without any real estate people involved to collect commissions.

Do you know how we can swap houses? He would get our house which he could not buy due to his credit and bad debts. We would get a property in an appreciating area. How does an escrow company handle a situation like this?

A. You have a rather complicated transaction you want to undertake and you don’t want to involve real estate people. You probably mean that you don’t want to pay a real estate broker’s commission on the sale of the home. You should, however, seek the help of a real estate attorney.

Unfortunately, I don’t think your trade will work. You are the people with good credit and money and your home is worth more. It seems rather unusual that this other person wants to sell his less expensive property to you and take on the added obligation of another property that costs even more. The person that lives in the “better” area has no money, has debts and his house is worth less than yours. In a straight trade, you would lose at least $40,000.

If you were to buy his home, he would end up with about $344,000 after paying his back taxes (if that is all he owes and without taking into account closing costs). After the sale of your home and paying off your lender, you would end up with about $232,000 (once again, without counting closing costs). You have credit and could get a loan for the purchase, but the person with the credit problems is stuck with only $344,000 to buy your $390,000 home.

It seems to me that this other person thinks that if he convinces you to buy his home, he then can sell your home later on and make more money on the sale. With his credit problems and debts, it would seem he would be looking at selling the home outright and scaling down, fixing his credit, and paying off his debts.

You could finance the difference when you swapped properties, but why would you want to take a chance with this person that has poor credit. Even if you believe that you are saving money by not having real estate agents involved, at five or six percent commission, the amount you would pay would be about $19,500 to $23,400. You are still out a sizable amount of money in the trade.

If you are truly interested in the home, you could sell your home on the market and buy his home as a FSBO (for sale by owner).

You asked how an escrow company would handle a swap, so that’s a clue that you must live in a state that does not generally use real estate attorneys to handle real estate transactions.

As with any other real estate transaction, the escrow company will follow the terms of the contract documents and the escrow agreement. In your case, I would advise you to have an attorney help you draft the documents. In some municipalities, you can avoid the payment of transfer taxes and other fees by performing a swap. However, in other communities, you’ll save no money with a swap, which is considered to be two independent sales that happen to close simultaneously.

Your refusal to involve real estate professionals is a mistake, because you’re counting the pennies, not the dollars that could be saved in this transaction. Talk to a real estate agent about working with you on a flat-fee basis to help you ascertain that what each house is worth in today’s marketplace.

If in fact the values of the homes are closer that you stated in your letter, you may be able to make the trade. Otherwise, you’re looking at the short end of the stick.