Seller finance a property with existing Mortgage

[Dustin Burke]

Has anyone seller financed a property when you still had an existing mortgage? 

Is this legal?

What are the pros & Cons?

What are the situations someone would consider this transaction? (ei: better cash flow)

Dustin

[Tracy Z. Rewey]

Originally posted by @Dustin Burke:

Has anyone seller financed a property when you still had an existing mortgage? 

Is this legal?

What are the pros & Cons?

What are the situations someone would consider this transaction? (ei: better cash flow)

 Hello Dustin,

Yes!  I have bought property subject to and I've also bought notes subject to underlying liens.  They are also referred to as All Inclusive Trust Deeds or Wraparound mortgages.  There are definitely "issues" to be considered surrounding the due on sale, being sure the first gets paid, escrows, etc.  Here is one example:

I bought a 4 plex out in Spokane WA with seller financing which my daughter nicknamed "The Pink House" (it was an old Victorian house painted pink with green trim).  The sales price was $139,000 with a down payment of $21,500 leaving an owner financed note of $117,500 at 8% amortized over 20 years. It had two underlying liens owed by the seller. Each month we sent our $983.00 principal and interest payment to the Servicing Company. 

The servicing company had a written agreement that they were obligated to forward a $476.17 principal and interest payment to the first position underlying lender and another $125.41 to the second underlying lien holder. The difference between our payment of $983 and the two underlying lien payments of $476.17 and $125.41 was $381.42. This net amount was remitted to the seller each month.

If the underlying lien holder collects an amount equal to 1/12 the annual tax and/or insurance due, then this amount would also be collected from the purchaser each month and passed through with the payment to the underlying lien holder servicing the reserves.

With “The Pink House” we had to make a claim on the insurance policy. The

tenants were predominantly college students (we had the parents co-sign the

lease). It was winter break and many went home for the holiday. It was a

particularly cold winter with temperatures below zero. We discovered college

students could be quite thrifty, as they all turned down the heat in their

individually metered units while away. When they returned and turned on the heat,

we received the emergency tenant call sending out an SOS. When I opened the

front door to the main entrance containing the grand stairway, there was a two story

waterfall cascading down the stairs. There was considerable damage and a

claim against the insurance was necessary.

Now it gets interesting. The underlying lien holder was listed as one of the loss

payees. The claim was for an amount sufficient to require the insurance company

to make the check payable to both of us, the insured and the underlying

mortgagee. Knowing this lender or mortgagee made a loan to the prior owners

and had a due on sale clause, I took a deep breath and bravely took the check,

closing documents and the contract down to the local branch office. I explained

the need for their endorsement to complete the repairs that were necessary to

maintain the value of their collateral. They looked up the loan, called a manager

and fussed about the fact the property had been transferred. After much

discussion, they endorsed the check and we never heard anything further. Our

sellers were paying them a rather high interest rate at 11% (we were only paying them 8% so do that math) and it seemed the lender was happy as long as they received their payments timely.