Seller financing question, Need Help

[Justin Escajeda]

I am asking a lot of questions lately! I appreciate all advice I get. I am having one hell of a time getting financed for a rental property I am trying to buy.

The seller is just your average home owner. He said he is up for seller finance, but is not sure how to set it up. Unfortunately, neither do I. Does the deed go to me right away, or after I Pay it off? Do we have a closing? If anyone has any advice of the topic I'D GREATLY appreciate it. Thank you!

[Jon Holdman]

You have multiple choices.

But a key question is "is there a mortgage on the property". If so, will it get paid off? I'm guessing that there is and that it won't be paid off. If that's the case, keep in mind that you are violation the due on sale clause with any of these. That gives the lender the right, though not the obligation, to call the loan.

There are arranged from most favorable to the buyer/least favorable to the seller to the reverse.

1) Subject to: You buy the house subject to the existing mortgage. You take over making the payments. Seller is still on the old mortgage but has no control at all over the property. Buyer gets deed from seller at closing.

2) Wrap mortgage: A new mortgage is created between the buyer and the seller. Buyer makes payments to the seller on the new mortgage, seller makes payments to the existing lender. Because the seller has a security interest, they can foreclose if the buyer doesn't pay. Buyer gets deed from seller at closing.

3) Land contract (aka contract for deed): Like a car loan. Seller retains title. Buyer makes payments on the contract. When the contract is completed, buyer gets deed. Process for dealing with a buyer default varies from state to state. Generally more like a foreclosure than an eviction.

4) Lease with option to buy: Two separate contracts. One is a lease which gives buyer possession of the property. Second is an option contract that gives the buyer the right to buy the house at some point in the future. There may be credits for part of the rent to the purchase price. Buyer gets deed when they exercise the contract. If buyer doesn't pay rent, the option contract is typically invalidated and the seller evicts the buyer. These can be very predatory and aren't allowed in some states (e.g., Texas.)