Trading places, maybe

Wall Street Journal
June 15, 2008
By AnnaMaria Andriotis

OVER THE YEARS, the Internet has helped many lonely hearts find mates. Now the web’s matchmaking skills are being put to use in a much different way: setting up homeowners who are looking to swap their homes.

In an increasingly unfriendly real estate environment marked by a glut of unsold inventory and tightening lending standards, a new niche of home-swapping web sites are offering to help desperate sellers unload their homes. These sites aim to match up two sellers based on their requested criteria, say, the number of bedrooms each home has or whether it’s located in a specific school district. The homeowners then arrange to trade properties and take over each others’ mortgages. For those looking to move fast, or who can’t afford to keep up with their monthly mortgage payments, home swapping can seem like an easy fix — but they should proceed with caution.

Since the subprime meltdown began, around 90 home-swapping web sites have launched, according to Dr. Danielle Babb, a real estate analyst and professor at Northcentral University in Arizona. But, warns Babb, less than a handful of them actually return the results sellers hope for. “Many of them make bogus claims that they can sell your home fast…[or] they charge fees that work in their favor rather than the seller’s,” says Babb.

However, some sites, such as OnlineHouseTrading and Pad4Pad.com she says, are on the up and up. OnlineHouseTrading.com consistently generates matches between sellers based on their listing criteria, says Babb, and both sites have strict privacy policies and low fees. OnlineHouseTrading.com, which was launched last summer, boasts some 42,000 home listings nationwide and its listings grow at an average monthly rate of nearly 50%, according to cofounder Daniel Westbrook. Launched just over three months ago, Pad4Pad.com already has around 2,500 house-swap listings. And according to founder Greg Holt, its listings are growing at a clip of about 30% a month.

Yet, even as house-swapping sites grow in popularity, their success rates remain questionable. (Both Westbrook and Holt say they don’t track the house swapping success stories that result from their site). According to Jeremy Brandt, CEO of Dallas-based 1-800-CashOffer, a national network of real estate investors who buy homes for cash, the probability of a match occurring is very low. “People should be careful about their expectations [because] a very small number of people ever get matched,” he says.

For homeowners willing to take the gamble anyway, here’s what you need to know before seeking a swap.

Keep an eye out for red flags

Not all house-swapping sites are created equal. Sellers should keep an eye out for sites that make promises that seem too good to be true (such as claiming they can arrange a swap in a certain period of time), says Babb.

Also, be wary of sites that charge a monthly fee to list a property. “A monthly fee…would give them reason to not want to sell your home,” says Babb. Instead look for a one-time upfront fee. OnlineHouseTrading.com charges a one-time fee of $20 — no matter how much time it takes to make a swap. Pad4Pad.com also charges a $20 fee, but if you refer five friends to the site (by providing their email addresses) your posting is free.

Insure your privacy

Think your personal information is private? Think again.

Unless their privacy policy states otherwise, a site can sell your contact information to real estate and mortgage brokers, as well as foreclosure specialists who will try to sell their services to you, says Brandt. So make sure to read the web site’s privacy policy thoroughly before you sign up.

Know what you’re getting

You can’t tell whether a roof leaks or mold is growing in the basement just by looking at a picture on a computer screen. If you’re planning a home swap, remember to take the same steps you would when buying a home in your local market.

“Really treat this transaction as you would treat any other,” says Neil Garfinkel, a real estate attorney and partner at the New York-based firm, Abrams Garfinkel Margolis Bergson.

Hire a local home inspector who can assess the house’s condition and visit the property at least once before you purchase it. Also, find out if the home has any liens by contacting the county recorder’s office (most counties have one). The most common liens, says Babb, are unpaid property taxes or a mechanic lien, which results from unpaid contractor work.

Get a lawyer you can trust

Think twice before accepting the attorney or closing agent recommended by the web site, says Garfinkel. Instead, shop around for a real estate attorney who knows the law in the city or state where you’re planning on moving. “Make sure that…your interests are adequately represented,” he says.

Know how to handle mortgages

One of the biggest hurdles to overcome in a home swap is getting a mortgage.

Both buyers can agree to apply for a new mortgage. The trick, says Holt, is that they both need to close on their new home in the same day in order for the new mortgages to be approved. Not only is that a daunting task, but getting approved for a mortgage in this market is also very challenging. Lenders continue to tighten their requirements, making it harder to qualify for a new mortgage.

Another option is to if the actual mortgage can change hands. Homeowners will find it nearly impossible to swap most conventional fixed-rate loans, for example. But those with conforming adjustable-rate mortgages (ARMs) — mortgages where the interest rate adjusts throughout its duration — may be in luck. As long as the loans’ fixed-rate periods have passed and the owners have not paid the mortgages in full, a swap is possible, says Steve Curnutte, a Nashville, Tenn.-based mortgage broker. (For example, with a 3-1 ARM, you must pay the mortgage for the first three years before you sell your home.)

Renting is an option

If you don’t get approved for a new mortgage and the existing mortgages are not assumable, sellers can agree to rent each other’s homes. For example, say a home’s mortgage is $2000 a month and it’s being swapped with a home that has a $1000 monthly mortgage; both homeowners can agree to rent each other’s homes — and thereby pay each other’s mortgages — for a temporary period of time.

When taking the renting route, homeowners need to keep two things in mind. First, don’t leave the renter in charge of paying your mortgage. There’s no guarantee they’ll make your mortgage payments on time. One missed or late payment can ruin your credit score. Second, if you sell the property, the IRS will hit you with a 15% capital gains tax if you haven’t lived in it as a primary residence for two of the last five years, says Curnutte.