Help! Seller is Financing My Deal! Now what?

Question

Hello All!

I have a quick question.

I have read a great deal of info about seller financing and I feel pretty comfortable with a deal I just struck with a worn out landlord. But I just want to verify a few things.

Can anyone with experience give me any best practices or pointers?

I am purchasing a property in Birmingham Alabama for $77,000 (ARV of $105,000) with seller carrying the mortgage.

We have agreed to 5% interest and $8,000 down.

The sellers still have a mortgage on the property so that is confusing me a bit on how to proceed.

I had initially thought about a 7 year amortization with a balloon payment, but how would that work if the owners are carrying the mortgage?

How can I structure this deal to where I have equitable interest if I wanted to cash out refi? (if even possible)

Any help would be greatly appreciated!

Thanks!

Charlie Fitzgerald · Answer

Get to a RE Attorney that is familiar with Subject To transactions.  If you don't do this the right way, you and the seller will be sorry.

Denise Evans · Answer

Virtually all mortgages have due on sale clauses. it does not  mean the lender WILL call the note. It is hard work finding good loans these days. A lender would prefer NOT to call the note.

I know a Birmingham attorney with experience in these types of transactions.  Send me a pm and I'll give you his name and contact info, if you need someone.

Brad Sanford · Answer

All the points are valid.  What often comes up is a  due on sale clause with the lender $36K mortgage.  If you did a straight sale, they might want that balance paid off immediately. If not, they may have a right to foreclose if they call the note and it is not paid or refinanced. Of course, if this is an older mortgage note, there might not be a due on sale clause, but that is unusual now.

You also want to find a way that your payment, or at least an agreed upon portion goes directly to the lender that has the mortgage.  I you put cash down, and he doesn't keep up the payments, you may have no rights if the lender forecloses.

I am going through a similar situation where I have a tenant that wants to buy. I am the seller, so I am working with my attorney to set up the process.

I'm in the Birmingham market, so let me know if i can help with some info.

brad

Bill Gulley · Answer

Follow Denise's advice.........good to see you back Denise.

Some poor lawyering by Tommy, the due on sale includes the transfer of any beneficial interests, forget land trusts as they are used to hide out but can still be called due.

The ONLY way I would be assured that some RMLO bunch was compliant with Dodd-Frank is by seeing a copy of their last brokerage examination.....because they have no clue if they are really compliant and neither would most RE attorneys. It's not the RMLO that must be compliant it's their employing broker to do third party originations for equity based lenders.

Just as I thought, Texas Pride Lending NMLS # 1479522 goes to Grant Kemp, well, search those posts here on BP where I've already commented.

Like I said, ask for a copy of their last examination by the Department of Finance/Banking in Texas! "Check the box to confirm" LOL. You can also check with the TREC, but they are rather new so you may not get much.

He probably has key word alerts so Grant might come back.

Now, for those who don't have a clue about banking, loans are examined at different times, verifications can be resent or new inquiries made, loans are pulled at random mostly unless some flag popped up, like transfers to a trust.

Examiners can seek tax records, oh, John's Trust isn't filed by John anymore, Jim filed it. Boom! Caught. You can't hide like the gurus say you can. There are other ways as well, but I'm not spilling the beans on audit procedures!

Your imagination will get you into trouble and so will listening to investor types who have no financial training or legal training.....and I don't mean guru training or from some RMLO type.

As to comments of being able to payoff that underlying loan, they are dead on. Sub-to deals are best used for short term bridge financing, not a buy and hold. The due on sale clause came about from the Garn-St.Germain Depositorty Institution Act of 1982, now that's 34 years ago, how many 35 year mortgages were made in 1982? None that I know of, so that means all current mortgages held by depository institutions will have the due on sale provisions!

If you need to assume a loan, look for a VA!

You might "assume" payments under a contract but you will never assume a mortgage without the lender's/note holder's consent. This isn't a bank thing, it's the type of contract that any promissory note is and a legal requirement that consent for assumption must be given.

Again, notes under servicing are assigned with contractual requirements for the servicer, a lender may hold a block of loans but they may not service them, one requirement is to enforce the due on sale, enforce the terms of the note, so if discovered the servicer has no choice but to follow the note terms, it has nothing to do with payments being received, interest earned, payoff amounts or the borrower being a great guy! For portfolio loans serviced by a bank, do you think FDIC will smile at that lender for ignoring the interest rate risk additional title issues of clouds on title in a foreclosure with a lender ignoring the terms of the contract? If you do, think again.

How often this happens is irrelevant, it does and will happen, it could well be your note, so be prepared to pay it off upon notice! :)

Brandon Shewbridge · Answer

Based on what I'm looking at  on the numbers, I think you're approaching this the wrong way.  Can you qualify for a $36,000 mortgage? If so why don't you get a conventional mortgage to pay off their note and then use seller financing for the difference. That would be the safest bet. With that much equity in the house it should be easy to get a loan if your credit is decent.

That way you don't have to worry about the due on sale clause being triggered or the current owners maintaining payments on the existing note (which is out of your control in the other scenario).

Jay Hinrichs · Answer

frankly sounds like you and seller just don't really understand much about how real estate works.

if there is a current mortgage  then HOw much is it??? do you know.

what are the terms of said mortgage.

will your payments to the seller cover their payments.

the only way this works is a sub too deal.. and if your not properly capitizlized and understand the mortgage your going to be wrapping then you are risking a lot.. along with the seller is risking their credit. if you can't perform.

hit me off line if you wish with details and I can step you through it

Nicholas Armstrong · Answer

@Kerry Baird

Awesome! Thanks for the link. There was a ton of helpful info!

@Brandon Shewbridge

Great idea! I'll speak with the sellers and see what they would like to do.

@Brad Sanford

Thanks for the advice! I would honestly like to cash out ASAP. My intention was to refi when repairs and updates are completed and move to the next one. (BRRRR)

@Denise Evans

Absolutely! I'll send you a PM. Thanks!

Brad Sanford · Answer

I do agree, if you can get the $36,000 loan. Most likely it would be a first mortgage and the seller would hold a note for the balance.  Make sure to have a firm understanding with the seller on this. I would recommend a RE Attorney help you with this.  It is simply best to try to clear up all details going into a deal than having to figure out details if something unexpected happens.

What is you timeline for cashing out the seller? A Lease-Purchase agreement may be a possibility between you and he, but I don't think it would give you as strong a position as a sale.

Kerry Baird · Answer

This post...

https://www.biggerpockets.com/forums/311/topics/32...

Nicholas Armstrong · Answer

@John Thedford

I certainly don't want that to happen. I will make sure I read the mortgage terms carefully before proceeding further. Other than land trust that @Tommy Reed mentioned are there any other creative ways to structure this deal?

Also, If I purchase Subject to I can refi at anytime correct?

Help! Seller is Financing My Deal! Now what?

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