Help with SELLER FINANCING

[Luis Herna]

Hi There,

let say that a property is being sold at 1M.  Seller has 300k in equity rest is on a fannie mae loan. Instead of me giving a down payment, seller will finance the 300K in 5 years and we want to structure the whole 300K as a interest-only loan . So my questions:

1. Can the entire 300K be structured as interest-only loan to avoid taxes or just part of the 300K can be structured as interest?

2. In a Seller Financing deal, once I start paying the seller the interest-loan + mortgage, the equity being built should goes to me and not to him correct?

3. Can some show me a good promissory note template?

[Nicholas L.]

@Luis Herna

if there's a loan on a property, then you can't seller finance - it sounds like you'd be taking over the mortgage sub to, and seller financing the rest of the equity.  this is sometimes called a 'hybrid.'

so if this is your very first deal - i would pass.  a hybrid is high risk for everyone involved.

good luck

[Luis Herna]

Quote from @Nicholas L.:

@Luis Herna

if there's a loan on a property, then you can't seller finance - it sounds like you'd be taking over the mortgage sub to, and seller financing the rest of the equity.  this is sometimes called a 'hybrid.'

so if this is your very first deal - i would pass.  a hybrid is high risk for everyone involved.

good luck

Ok understood and yes, it is a hybrid. I take the loan on subject to and the equity finance for the seller.   Please tell me why is high risk?

[Chris Seveney]

Quote from @Luis Herna:

Hi There,

let say that a property is being sold at 1M.  Seller has 300k in equity rest is on a fannie mae loan. Instead of me giving a down payment, seller will finance the 300K in 5 years and we want to structure the whole 300K as a interest-only loan . So my questions:

1. Can the entire 300K be structured as interest-only loan to avoid taxes or just part of the 300K can be structured as interest?

2. In a Seller Financing deal, once I start paying the seller the interest-loan + mortgage, the equity being built should goes to me and not to him correct?

3. Can some show me a good promissory note template?

 1. you could structure it as interest only, and the lender would pay ordinary income tax rate on the interest paid. even if interest rate was 0% they would still pay around 4% (FAR rate) in taxes.

2. If you are paying interest only, you are not paying down the mortgage. on the $700k you would be, but equity depends on whether its a land contract or traditional note  - depends on structure.

3. good template google fannie mae security instruments.

Also, my question is if you have not money for a down payment, how can you afford a $700k p&i payment along with $300k I/O payment?

[Luis Herna]

Quote from @Chris Seveney:

Quote from @Luis Herna:

Hi There,

let say that a property is being sold at 1M.  Seller has 300k in equity rest is on a fannie mae loan. Instead of me giving a down payment, seller will finance the 300K in 5 years and we want to structure the whole 300K as a interest-only loan . So my questions:

1. Can the entire 300K be structured as interest-only loan to avoid taxes or just part of the 300K can be structured as interest?

2. In a Seller Financing deal, once I start paying the seller the interest-loan + mortgage, the equity being built should goes to me and not to him correct?

3. Can some show me a good promissory note template?

 1. you could structure it as interest only, and the lender would pay ordinary income tax rate on the interest paid. even if interest rate was 0% they would still pay around 4% (FAR rate) in taxes.

2. If you are paying interest only, you are not paying down the mortgage. on the $700k you would be, but equity depends on whether its a land contract or traditional note  - depends on structure.

3. good template google fannie mae security instruments.

Also, my question is if you have not money for a down payment, how can you afford a $700k p&i payment along with $300k I/O payment?

Hi Christ, thank you.

 Regarding number 2. I am trying to making deals via  Subto. I pay seller over time and I will pay the mortgage myself which is subto. If the due on sale is trigger I also have my back up plan (just realized that some old freddie mae) does not have this clause on its terms).

After 4 weeks I realized the problem here is not finding a equity or debt partner and no even convince the Seller to go Subto. The mayor challenge here is to accurately know and predict how much and the time it would take to renovate the units that are not rent-ready to bring occupancy to 95%. Most of investor are very bad at getting the right numbers, to me this is critical. Also the market and income level (5 miles around the property) is also critical.

[Luis Herna]

Quote from @Account Closed:

Yes, the entire $300K can be structured as an interest-only loan, depending on what you and the seller agree upon. However, it's important to understand that while an interest-only structure can reduce your immediate payments, it doesn't avoid taxes. The seller will still be responsible for paying taxes on the interest income they receive, and when the principal is eventually paid, there may be tax implications for both parties, depending on how the deal is structured. It’s advisable to consult with a tax professional or real estate attorney to ensure the arrangement meets both your needs and complies with tax laws.

In a seller financing deal, once you start making payments, any equity you build in the property does indeed go to you, not the seller. Essentially, the seller has agreed to let you pay off a portion of the property over time, so as you pay down the loan, you’re increasing your equity stake in the property. The seller’s equity was essentially converted into a loan to you, which you're paying back with interest. If you’re managing this process, using a platform like Agecroft Capital can help streamline the tracking of payments and equity as you go.

As far as the risk? Yes, being in a second position is generally considered higher risk because the first mortgage takes priority if the borrower defaults. In the event of a foreclosure, the lender holding the first mortgage is paid off first, and the second-position lender, in this case, the seller, only gets whatever is left. This can be particularly risky if the property's value drops or if the sale doesn’t cover both loans, leaving the second lender with a reduced recovery or possibly nothing at all. Additionally, if the borrower faces financial difficulties, they’re more likely to prioritize payments on the first mortgage to avoid foreclosure, which could lead to missed payments on the second loan. Because of these risks, second-position loans often come with higher interest rates and stricter terms to compensate for the increased likelihood of loss. It's important for both parties to fully understand these risks before entering into a second-position loan agreement.

Thank you for the info. I am loosing my sleep learning and learning this. There are so much opportunities out there. The problem is not finding a equity or debt partner and no even deals,  the problem is not knowing the numbers, the market and a TRUE NOI. Most deals fall through because investor did not calculate these numbers accurately.  There are many deals with assumable loans at 3.5% so going SUBTO is a great opportunity to catch them. But you have to have a backup plan is the due on sale is called. by the way, not sure why people fears the clause. 

[Chris Seveney]

Quote from @Luis Herna:

Quote from @Account Closed:

Yes, the entire $300K can be structured as an interest-only loan, depending on what you and the seller agree upon. However, it's important to understand that while an interest-only structure can reduce your immediate payments, it doesn't avoid taxes. The seller will still be responsible for paying taxes on the interest income they receive, and when the principal is eventually paid, there may be tax implications for both parties, depending on how the deal is structured. It’s advisable to consult with a tax professional or real estate attorney to ensure the arrangement meets both your needs and complies with tax laws.

In a seller financing deal, once you start making payments, any equity you build in the property does indeed go to you, not the seller. Essentially, the seller has agreed to let you pay off a portion of the property over time, so as you pay down the loan, you’re increasing your equity stake in the property. The seller’s equity was essentially converted into a loan to you, which you're paying back with interest. If you’re managing this process, using a platform like Agecroft Capital can help streamline the tracking of payments and equity as you go.

As far as the risk? Yes, being in a second position is generally considered higher risk because the first mortgage takes priority if the borrower defaults. In the event of a foreclosure, the lender holding the first mortgage is paid off first, and the second-position lender, in this case, the seller, only gets whatever is left. This can be particularly risky if the property's value drops or if the sale doesn’t cover both loans, leaving the second lender with a reduced recovery or possibly nothing at all. Additionally, if the borrower faces financial difficulties, they’re more likely to prioritize payments on the first mortgage to avoid foreclosure, which could lead to missed payments on the second loan. Because of these risks, second-position loans often come with higher interest rates and stricter terms to compensate for the increased likelihood of loss. It's important for both parties to fully understand these risks before entering into a second-position loan agreement.

Thank you for the info. I am loosing my sleep learning and learning this. There are so much opportunities out there. The problem is not finding a equity or debt partner and no even deals,  the problem is not knowing the numbers, the market and a TRUE NOI. Most deals fall through because investor did not calculate these numbers accurately.  There are many deals with assumable loans at 3.5% so going SUBTO is a great opportunity to catch them. But you have to have a backup plan is the due on sale is called. by the way, not sure why people fears the clause. 

 The reality is many of these are not deals because the sellers will not do subto.Its like asking a married person to marry you and leave their spouse. Well yes technically they can do it but they will not. The number of subto deals is extremely low (far less than 1%). 

My question is if you do not have $ or a partner and do not know the numbers or how to calculate them, then why are you wasting your time with this? You could spend a lot less time finding a traditional property and go that route. But again, real estate takes money. If you do not have it, 99.9% of us start with it by earning it.

[Travis Timmons]

@Luis Herna I've seen you on the forums asking all sorts of questions around creative strategies. It sounds like you've spent a lot of time on YouTube and are looking for a shortcut. As much as you likely don't want to hear it, you're probably going to have to do the following to build wealth.

1. Go make money and save it. 

2. Pay off debt.

3. Buy a good asset with a responsible amount of leverage. Or buy an index fund with no leverage and let the magic of compound interest do its thing.

4. Rinse and repeat.

[Nicholas L.]

@Travis Timmons

but that sounds like it might take some time...

[Luis Herna]

Quote from @Chris Seveney:

Quote from @Luis Herna:

Quote from @Account Closed:

Yes, the entire $300K can be structured as an interest-only loan, depending on what you and the seller agree upon. However, it's important to understand that while an interest-only structure can reduce your immediate payments, it doesn't avoid taxes. The seller will still be responsible for paying taxes on the interest income they receive, and when the principal is eventually paid, there may be tax implications for both parties, depending on how the deal is structured. It’s advisable to consult with a tax professional or real estate attorney to ensure the arrangement meets both your needs and complies with tax laws.

In a seller financing deal, once you start making payments, any equity you build in the property does indeed go to you, not the seller. Essentially, the seller has agreed to let you pay off a portion of the property over time, so as you pay down the loan, you’re increasing your equity stake in the property. The seller’s equity was essentially converted into a loan to you, which you're paying back with interest. If you’re managing this process, using a platform like Agecroft Capital can help streamline the tracking of payments and equity as you go.

As far as the risk? Yes, being in a second position is generally considered higher risk because the first mortgage takes priority if the borrower defaults. In the event of a foreclosure, the lender holding the first mortgage is paid off first, and the second-position lender, in this case, the seller, only gets whatever is left. This can be particularly risky if the property's value drops or if the sale doesn’t cover both loans, leaving the second lender with a reduced recovery or possibly nothing at all. Additionally, if the borrower faces financial difficulties, they’re more likely to prioritize payments on the first mortgage to avoid foreclosure, which could lead to missed payments on the second loan. Because of these risks, second-position loans often come with higher interest rates and stricter terms to compensate for the increased likelihood of loss. It's important for both parties to fully understand these risks before entering into a second-position loan agreement.

Thank you for the info. I am loosing my sleep learning and learning this. There are so much opportunities out there. The problem is not finding a equity or debt partner and no even deals,  the problem is not knowing the numbers, the market and a TRUE NOI. Most deals fall through because investor did not calculate these numbers accurately.  There are many deals with assumable loans at 3.5% so going SUBTO is a great opportunity to catch them. But you have to have a backup plan is the due on sale is called. by the way, not sure why people fears the clause. 

 The reality is many of these are not deals because the sellers will not do subto.Its like asking a married person to marry you and leave their spouse. Well yes technically they can do it but they will not. The number of subto deals is extremely low (far less than 1%). 

My question is if you do not have $ or a partner and do not know the numbers or how to calculate them, then why are you wasting your time with this? You could spend a lot less time finding a traditional property and go that route. But again, real estate takes money. If you do not have it, 99.9% of us start with it by earning it.

Well I just spoke to the bank serving the assumable loan and they said they could sign me a waver that the due on sale clause will not trigger as long as you paid. Perseverance is the key..

[Chris Seveney]

Quote from @Luis Herna:

Quote from @Chris Seveney:

Quote from @Luis Herna:

Quote from @Account Closed:

Yes, the entire $300K can be structured as an interest-only loan, depending on what you and the seller agree upon. However, it's important to understand that while an interest-only structure can reduce your immediate payments, it doesn't avoid taxes. The seller will still be responsible for paying taxes on the interest income they receive, and when the principal is eventually paid, there may be tax implications for both parties, depending on how the deal is structured. It’s advisable to consult with a tax professional or real estate attorney to ensure the arrangement meets both your needs and complies with tax laws.

In a seller financing deal, once you start making payments, any equity you build in the property does indeed go to you, not the seller. Essentially, the seller has agreed to let you pay off a portion of the property over time, so as you pay down the loan, you’re increasing your equity stake in the property. The seller’s equity was essentially converted into a loan to you, which you're paying back with interest. If you’re managing this process, using a platform like Agecroft Capital can help streamline the tracking of payments and equity as you go.

As far as the risk? Yes, being in a second position is generally considered higher risk because the first mortgage takes priority if the borrower defaults. In the event of a foreclosure, the lender holding the first mortgage is paid off first, and the second-position lender, in this case, the seller, only gets whatever is left. This can be particularly risky if the property's value drops or if the sale doesn’t cover both loans, leaving the second lender with a reduced recovery or possibly nothing at all. Additionally, if the borrower faces financial difficulties, they’re more likely to prioritize payments on the first mortgage to avoid foreclosure, which could lead to missed payments on the second loan. Because of these risks, second-position loans often come with higher interest rates and stricter terms to compensate for the increased likelihood of loss. It's important for both parties to fully understand these risks before entering into a second-position loan agreement.

Thank you for the info. I am loosing my sleep learning and learning this. There are so much opportunities out there. The problem is not finding a equity or debt partner and no even deals,  the problem is not knowing the numbers, the market and a TRUE NOI. Most deals fall through because investor did not calculate these numbers accurately.  There are many deals with assumable loans at 3.5% so going SUBTO is a great opportunity to catch them. But you have to have a backup plan is the due on sale is called. by the way, not sure why people fears the clause. 

 The reality is many of these are not deals because the sellers will not do subto.Its like asking a married person to marry you and leave their spouse. Well yes technically they can do it but they will not. The number of subto deals is extremely low (far less than 1%). 

My question is if you do not have $ or a partner and do not know the numbers or how to calculate them, then why are you wasting your time with this? You could spend a lot less time finding a traditional property and go that route. But again, real estate takes money. If you do not have it, 99.9% of us start with it by earning it.

Well I just spoke to the bank serving the assumable loan and they said they could sign me a waver that the due on sale clause will not trigger as long as you paid. Perseverance is the key..

 Did you get that letter? Did you get qualified and tell them you are also getting a $300k interest only second loan on the property?