Owner finance deal set up too good?

Question

I was all set to close today, but the bank waited til the 11th hour to tell me the comps were too old (2 years old) and there's no way they could take the loan. This was a small bank who is supposed to be innovative, but couldn't do it. I know some people at chase bank and they gave me the same story. The house appraised at purchase price so I'm a little confused. Either way, doesn't matter, deal is dead. So I thought. The house is great, so I called the seller directly and asked if he would sell it to me 0% down, 5% rate, 30 year schedule with a 3 year balloon. He say sure thing.

I was surprised as he is not motivated being a well to do investor and the property is fully rented, but repairs have been neglected and I'll drop 15K in the next 90 days.

Since I've had under contract for the last 45 days I've done my DD. Tenants are great and I've climbed all through that place. Very comfortable with my numbers.

Sorry for the long post. My question is how does this actually work? The gritty details.  Can he give me a land contract if he has an outstanding mortage? (my realtor says he did have one of 140k) What are my risks?

Thanks in advance.

Jerry W. · Answer

@Josh Compton , I don't know Indiana law, but here is how it work in my state.  If he has an existing mortgage you do a contract for deed.  You sign a quitclaim deed to him, he signs a warranty deed to you, there is a Contract for Deed that sets out all the terms, like price, interest, whether there is an existing mortgage, when and where you make the payments, balloon date, etc.  It provides for an escrow agent to hold all the documents and record and process all the payments.  It can provide for the escrow agent to pay the mortgage with your payments and provide proof to both parties.  There is also usually a title policy.  You are required to provide proof of insurance with you and the Seller named as payees, sometimes the bank is also listed.   A memorandum of sale is filed in the courthouse setting out the fact you are in a contract to buy the land from him.  Sometimes you reimburse the seller for insurance and he signs over his rights to the policy to you.  if you make all the payments as set out in the contract, the escrow agent turns all of the original documents over to you after you pay it off, and you file the warranty deed to you.  If you default they are required to give you notice, usually 30 days to cure your default or you forfeit all interest in the Contract and the documents are turned over to the Seller, and files the Quitclaim deed from you to him.

There are more details but hopefully you get the idea.  It is similar to a subject to purchase.

Oh sometimes the escrow agent is the bank holding the mortgage so they are confident they will get paid.  Usually the main objection you will get from a bank is if your seller has an extremely low interest loan.  They want to get their money back as soon as possible to collect higher interest on it.

Josh C. · Answer

just an update, I bought the place. Land contract 4.5% rate and $1k down. Should be a great investment.

Thanks for your advise @Jerry W.  It was really helpful.

The only legal thing I need to do is record the mortgage?

Shawn Holsapple · Answer

The income looks really low with those numbers?  I added 10% vacancy & 10% PM fees as well.  Then subtracted the $966 payment.  That only leaves $337 monthly cash flow not counting any repairs.

Did I miss something?

Even at $3k per month income that's still only $14k per year on nearly a $200k investment.

Either way, you are looking at a subject to purchase.  You get the deed, the seller keeps the loan in place.

Josh C. · Answer

Thanks a lot Jerry. You are right about this being my first seller finance deal. The goal is to have at least 25 equity in 3 years.

Jerry W. · Answer

When I buy on a contract with the seller I try to do a 5 year balloon.  If you do a 15 year loan, at the end of 5 years you will have paid off 20% of the total purchase price, so you can refinance and have your 80% equity.  Still its a great buy, and you put money into fixing it up and your market is appreciating you should be able to finance for enough to not put any more money down.  I am giving you a vote not just for getting a great deal, but for doing the legwork and actually pulling the trigger.  It is obviously not your first deal, but I suspect it is probably your first Seller finance deal.  Anyway GREAT JOB!

Josh C. · Answer

@Jerry W.

We filed the mortgage and a sales disclosure with the state.  The owner does still have a mortgage on it. My mortgage has a 3 three ballon payment on it, which I think is lots of time, and we'll know in three years if that was a good decision. My PITI payments are $1225. Current rent is $1950, but that is a little low for the area, but I am still happy as it's sits. I did a title search and only his mortgage showed up, but I was under the impression I couldn't get title insurance until I formally close in 3 years? I would also like 20 more of these. I think anyway :)

This is an old historic area that's turing into hipster village, and half of a duplex fixed up is selling for more than I paid for the whole thing, so I feel good about the future.

Thanks

Jerry W. · Answer

@Josh Compton  if the ownership passed to you then yes there is a mortgage to file from you to him.  If the Seller still owes on it you may just have a land contract, in which case you file a memorandum of sale.  Either way yes there should be a document you file at the courthouse.

I am happy I was of some help to you.  it is even better that you got a good rate on your loan and you only had to pay $1K down is awesome.  I need to buy about 20 houses that way.  Please share how much your payments are and the length of your mortgage?

As an added note did you get title insurance?  It will tell you if he has an outstanding mortgage, as well as any other encumbrances.  ALWAYS get title insurance.

Nii Okai · Answer

Hi Josh,

Are we talking about a single family house? In a SFR with one tenant, you can only have 100% occupied or if vacant it is 100% vacant. You cannot add 10% for vacancy.

(The house is either occupied or it is vacant) But on the other hand if it had been a 10 unit property, and if one unit were to be vacant, that would have given you 1 out of 10 or 10% vacancy).

As it is, this deal may or may not be a good deal. All depends on what you call a deal. A deal means different things to different people. If you think the figures do not jive, based on your criteria, walk away....  A juicier deal is just around the corner, huh?

If I may, I will suggest you should join your local REIA. Look around and make friends with other investors. Take one or two to lunch and pick their brains. If necessary, make them your friends and you will not regret it. You must be teachable and coachable. Remember, there is no shame in asking questions, Ask and you will receive, Seek and you will find and Knock and the doors will be open unto you.

Wishing you all the best

Josh C. · Answer

also I'm in Indiana if that helps, really just trying to wrap my head around seller finance and what my risks are if he has a mortgage in place? I guess he can miss payments and get foreclosed on and I am SOL? Do I make his payments (I doubt he wants that as he's a much bigger fish than me)? Do we both have insurance?

Thanks again

Josh C. · Answer

@Jerry W.

@Joe Gore

thanks so much for the reply guys, this place is awesome.

Sorry meat on the bones.

180k

Insurance 1100/yr

Water $100 monthly

Taxes $2500

Rents are 2000 monthly, but that is really low, $3000 is market, but I would need some updating. I also own a building right down the block so I am invested in the area.

This being my first non cash or bank loan I have no idea. I assumed like normal I'd get title and cover my own insurance and taxes. Is this how land contracts work?

@Nii Okai undefined

Owner finance deal set up too good?

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