Seller Financing w/ existing mortgage??

[Connor Feist]

Lets get creative!!

I currently own a townhome in Texas that is leased through summer 2024. The property has appreciated since my purchase and rates are also in the mid 7s vs the 2.875% 30 year fixed that I have.

I've explored HELOCs and refinancing to try and get some cash out but none of that makes economic sense right now (I have just under 20% equity in the property).

I reached out to a few local real estate attorneys to hear their thoughts (and the legality) of selling the home with seller financing while having an existing mortgage. My thought is that I will become the bank for the new buyer while I continue to make my regular monthly payments with my existing mortgage lender. The feedback I received was, yes, you will legally trigger the due-on-sale clause with your existing mortgage lender, but if the loan continues to perform (e.g. I continue to make the monthly payments) then they are very unlikely to accelerate the loan and go through the time, cost and hassle of foreclosing on me. They said they typically are not upfront with sharing the potential seller financing information with the existing mortgage lender ahead of this transaction, and that the firm has never seen a mortgage lender effectuate a due-on-sale clause for these transactions if the loan continues to perform. It sounds plausible, however, I'm unsure what the cost of foreclosing on a loan is for a major mortgage lender vs the increase in margin they could receive from a new loan in the mid 7s.

Question 1: Has anyone here been through this (or a similar transaction)? Were you forth coming with your mortgage lender? Will they care as long as the loan continues to perform? Has anyone had a due-on-sale clause triggered on them? Any feedback would be helpful for a *potentially* first time seller financier.

Question 2: For anyone who has been though a seller financing, what was your deal structure? I'm leaning towards ~7% fixed, amortized over 30 years with a balloon at the end of 5 or 10 years. I'd like at least 20% down payment (to get some cash out), but might drop to 15% to incentivize buyers. At 7%, the first 5-10 years earns the buyer relatively little principle, so I'd be receiving a ton of interest up front and still have meaningful value waiting at the balloon payment.

Question 3: Any reason why this would not be pretty interesting for a 1031 exchange investor? The property is currently leased until summer 2023 and I would expect the tenants to renew for a second year. With 20% down payment and ~$400k loan, mortgage payments would be $2,600-2,800/month vs the $3,500/month rental income - nice cash flow for an investor from the jump. Its also turnkey; 2014 build and doesn't need any rehab work.

Question 4: Another interesting element of seller financing is trading expensive realtor and closing costs for a much smaller real estate attorney bill (thinking 1-2% vs 8-10%) - lmk if that seems outlandish. I'm curious to know if most buyers will require a realtor for their transaction and if I should bake in paying a buyers agent 3%?

Interesting stuff. Thanks in advance for any thoughts!