Selling a house Contract for Deed and then refinancing

[Dustin M.]

Hi guys,

Is this possible? I have tried to do some searches on this website and google but haven't found anything yet.

This Sunday we are having an open house for the place we just finished rehabbing. In our ad we indicated that we would sell the place outright if someone had cash / bank loan or contract for deed.

It seems like we might have an easier time selling the place contract for deed at 10% interest and nearly double the price we paid to buy and rehab it :D

Does anyone know if we did sell it contract for deed could we then go to the bank and ask them if we could refinance the place we just sold? Could we refinance for the contract for deed sale price? This way we could have some money available to find and purchase some more deals.

I know some people do cash out refinancing but from all the posts I've seen about it, people are initially buying the house with cash up front. I haven't seen posts where someone is trying to do a cash out refinancing after they sell the place contract for deed.

Thanks,

Dustin Michaels

[Jon Holdman]

You've answered your own question: "refinance the place we just sold". Uh, if you're just sold it, you don't own it, and therefore you cannot use it for security.

If this were a simple owner financing, it would be very clear. You own a house free and clear. You sell it with owner financing. Then, you go to the bank and say you want to refinance this house. They would look at you like you had two heads, because you're trying to use someone else house for security.

Now, a contract for deed is a little fuzzier. But only a little. A contract for deed is the same way most people buy cars. You're the lender, but you keep the deed (title, for a car) in your possession. The house (car) belongs to the buyer/borrower. The lender can't use it for security for another loan.

Strickly speaking, if you sell a house on a contract for deed (or a wrap mortgage or subject to or via a lease/option) and you have a mortgage on it, you've just violated the due-on-sale clause in that mortgage. When you sell a house with any of these methods, you've transferred a equity interest in the property to someone else. Your existing loan will state the loan is to be paid off when that happens. Now, at least for now, it seems like the risk of a bank actually calling such a loan due is small. OTOH, you walk into the bank and tell them what you've just done and you may significantly raise the odds of getting the loan called.

What you might be able to do if you buy a house for cash, rehab it, and then sell it for a very nice profit like you imply for this deal is to sell it with owner financing. Not a contract for deed, just a plain vanilla mortgage. Then, you turn around and sell the mortgage to a note buyer. Now, you will sell the mortgage at a significant discount over its face value, probably 70-80 cents on the dollar. But that might work out well.

For example, you buy and fix a house for $100K. You sell it for $200K (that's what you're implying above). You collect a 10% down payment, $20K. You finance the rest on $180K mortgage. You turn around and sell the mortgage for 80% of its value, or $144K. You've just netted $164K between the sold note and the down payment. You'll get a better price for the note if you let the seller make some payments and make sure they have good credit and income. You also need to be sure the crummy comps support the value. Five years ago you could cherry pick the best comps in the neighborhood and use those. No more. Much more likely an appraiser will use some of the worst comps to come up with a value. A note buyer will verify your valuation. If the crummy comps support $175K in this example, a note buyer's going to demand a bigger discount than if they crummy comps support $200K.