Buying Subject 2 / seller financing - Refinance question

[Amit Sharan]

I've decided to give a try to buying a property using seller financing, in this case "subject 2" existing mortgage. Here is how the transaction is being structured.

-The seller would first transfer the house into a new LLC.

-Next, the ownership of the the llc would be transferred to me. I'll become the sole owner of the llc and hence the property.

-The existing mortgages would continue to be in seller's name. I'll start making monthly payments on the mortgage.

I like the deal as it is allowing me to acquire the property with limited down payment and not the usual 25% for investment properties and it won't increase my DTI allowing me to expand my portfolio faster.

Couple of questions.

1) I'm aware of the risk that the lender of current mortgage may call the entire loan due. Do you see any other risk to me the buyer apart from "due on sale" ?

2) In case the loan is called due, would I be able to secure a new mortgage on this property to pay back the previous lender? I understand that I'll need to qualify for a new loan and pay the required down payment. But assuming I'm able to qualify based on my credit and DTI, do you see any other reason why I may not be able to secure a new mortgage? Say I buy the house through llc ownership transfer in May 2018 and the lender immediately invokes the "due on sale", do you see any issue with me being able to secure another loan or refinance. I can transfer the property to myself and apply mortgage in my personal name if required. I won't have any existing mortgage on the property in my name.

Would the banks like any seasoning before lending to me on this property? I'll appreciate a response from anyone experienced with this scenario. Thanks.

[Mitch Messer]

Hi @Amit Sharan! Yes, there are several risks to buying Sub2 the way you propose. For one, the Garn–St. Germain Depository Institutions Act allows homeowners to transfer property into trusts without triggering the "due-on-sale" (DoSC), not LLCs, as far as I know.

So, right off the bat you'd be making it very clear to the lender that ownership had changed hands, thus triggering the DoSC. You'd also have issues with property insurance, namely proving to the lender that their interest in the property was still protected by a valid policy.

Sub2 is an extremely powerful technique, but it demands total respect. You need training and rock-solid paperwork.

If you are doing this deal here in Georgia , I would urge you to:

1. Learn what a local expert, like Dyches Boddiford, teaches about Sub2. Google him for his Creative Financing Course.
2. Get solid, impeccable, and Georgia-tested Sub2 paperwork (again, I say Dyches is your man).
3. Don't even think of not doing a formal closing with a real closing attorney and a HUD-1 and title insurance and everything.

Here's a pro tip: Your biggest risk from Sub2 isn't the DoSC; it's the seller who conveniently "forgets" they sold you the house two years from now and accuses you of bamboozling them into giving away their house.

Good luck!