Pros and cons of Owner finance & Subject 2?

Question

Jay Hinrichs · Answer

@Tyler H.  I have done a bunch as well as a buyer... probably over 100 of them.. however and its a big however we were a very well capitalized company... so if we got a call on a note we could stroke a check...

when the gurus teach this to the empty pockets \crowd its fraught with danger for the seller.. and or flat out crooks who just use it as a tool to get into title and either harass the bank while ripping rents or simply rip rents and move on.

Will Barnard · Answer

Sellers perspective on selling sub2 or owner financing - Pros are  Seller could get more for the property due to the owner carried note, seller can receive an income stream, seller can continue good credit history with the mortgage remaining in place and timely payments from buyer. Cons - If seller needs to make another purchase prior to the term of the sub2 expiration, they may not qualify for another loan, the buyer could fail or perform and they would need to keep up with the payments on the mortgages to save their credit and potentially have to file for foreclosure on the buyer. Most of the cons can be avoided with proper contracts, proper terms, and working with a solid and experienced buyer.

Buyers perspective on owner financing and sub2 - Pros are buyer can purchase with little or no money down,lower interest rates on sub2 existing rates compared to private or hard money rates, lower seller financing rates compared to private or hard money rates, ability to purchase at a higher price to get the deal because of the interest savings on the seller or sub2 mortgage.

When done correctly, a seller carried note or sub2 purchase can be very beneficial for both parties as it can often resolve a problem or problems on each side of the coin. Again, working with competent buyers and good contracts is essential.

Tyler H. · Answer

@Jay Hinrichs Agreed, Lots of Liability for Seller, especially if Buyer does not plan on backing their part of the agreement--maybe not the best type of transaction for a newbie, with no cash. That's why I think it's best to structure deal for attorney, where it can be undone, quickly, in case of due on sale or buyer default. Disclosure to Seller is Critical, so they know all facets of the deal.

I had a seller in the military, who was re-stationed out of state, needed to move quickly. We took property over subject 2, never missed a payment, sold property 3 years later--worked out great for everyone.

Brandon Schlichter · Answer

Pros : Less money down, potential ability to exit if the property ends up being a crummy deal and you'll just be out the money.

Cons : Seller  could POTENTIALLY put the house under water or make it non-transferable should you chose to exercise an option or eventually purchase the contract. Most sellers I've run into also want a premium as they know you can't currently afford it.

Brian Gibbons · Answer

Good reading for TEXANS

http://www.lonestarlandlaw.com/subject-to-transact...

http://www.lonestarlandlaw.com/Wraparound.html

http://www.lonestarlandlaw.com/owner_finance.html

There is a book from mitch stephen about buying 100s of houses in South Texas on Private Lender Financing and selling on a wrap around mortgage, no due on sale issues.

https://www.amazon.com/My-Life-000-Houses-Financia...

Jay Hinrichs · Answer

@Tyler H.  sub too Cons for seller:   .... buyer flakes and leaves them not on title with a loan still in their name .. buyer is ripping rents.. seller has to litigate to get title back and make payments lest their credit gets trashed... and in Texas were the bank can sue for a deficiency judgment this can be devastating to a seller..

Seller trys to buy another home but cant since this mortgage is still in their name.. etc etc.

Very Risky for seller.... and there are a lot of fraudsters out there that just flat lay away a uniformed seller.

Tyler H. · Answer

There is opportunity in Sub 2 Deals, but appropriate disclosures and paperwork are critical. Hiring a competent Real Estate Attorney and Insurance Professional who have done this type of transaction are a must. It's a viable strategy for sellers who are out of "cash offer"options due to lack of equity and time is of the essence (pre foreclosure, moving out of town, etc).

Pro's:  Can Buy a Deal with Minimal Cash Out of Pocket, then Sell via a Wrap Note or Lease Property

Con's:  Due on Sale Clause, Overcoming Seller Objections, Many Moving Parts

Eli Molloy · Answer

It sounds like you are looking at SFHs?  For the most part, I hear of seller financing being used in 2 situations when buying SFHs.

1: When a buyer has reached the max number of traditional Freddie/Fannie loans they can get.  Traditional bank financing will usually give you better terms that seller financing.

2: When the buyer doesn't have the money for the down payment. Traditional financing usually requires 20% down. If you can get a seller to carry more than 80% of the purchase price then you won't have to have as much cash for the purchase.

Seller financing is appealing to sellers who do not immediately need the cash  from the sale and are interested in "mailbox money". Ex: investors looking to get out of the business and retire.

Brandon Schlichter · Answer

I have done one and it was an absolute disaster because I wanted to bring in his attorney. He agrees all of my request the last part of November and we finally signed on the paperwork last Friday.

I have several more lined up but it was such a screw a deal it is kind of made me hesitant to do anymore.

The pricing of the deal was not fantastic and it may make sense just to get some sort of better financing in place before I pursue them in better efforts.

Pros and cons of Owner finance & Subject 2?

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