CAN SOMEONE PLEASE EXPLAIN SELLER FINANCING A RENTAL?!

Question

Ok, I have browsed the internet, asked real estate professionals, and dug through my real estate investing books but I still cannot fully grasp the concept of seller financing from the position of a buyer looking to invest in a rental. Here's my situation.

I am a new investor. I don't have a ton of cash and I already own my primary residence and will not qualify for a conventional loan to buy a rental. I have identified a great opportunity to buy a rental, but with my financial position I need to be creative with how I buy. I plan to offer $72,000 for the property. The seller owes $42,000 on the home. It is currently vacant but rents for about $1,200/month. I am looking to work out a seller financing option to where I can put down about $15,000 and make monthly payments of about $400-$500, while renting out the unit for market rate.

My questions are:

1) How do I structure this deal? (I know I'll need an attorney)

2) How will the seller's current lender be involved?

3) Do I need to get a bank involved?

4) What are my options on exit strategy? (paying the seller off and possibly refinancing)

5) Where would I make payments? Directly to the seller or to a 3rd party? What is that process like and does that 3rd party cost?

I am in the dark here. Please Help!

Caleb Heimsoth · Answer

@Mitchell Pollard since the seller owes money to a bank, this gets a lot more tricky. If it’s owned free and clear all you do is write up a note contract with an attorney, give them the down payment and record the mortgage. Easy, and clean.Since there’s a bank loan Involved this would become basically a wrap mortgage, where the seller creates a mortgage for you at a higher interest say 8 percent. Then your payment to seller is higher then the sellers payment to their bank. You pay the seller, the seller pays the bank and the difference is their cash flow or return.Where it gets tricky is if the sellers bank finds out the deed was transferred and/or another mortgage is recorded, they may call the loan due, and if the seller can’t pay it off, the bank could foreclose on the property you bought. Now I am not an expert on this stuff, and some of it may be slightly off but that is a general idea of how it works and what could happen.

Lori Greene · Answer

Actually, we've successfully done both: qualified for a conventional loan on a non-owner occupied home we rented out and seller financed a rental where the owner still had a mortgage.As far as qualifying, it depends on the lender. Shop it around and see what you can find. Maybe you can call it a second home rather than a rental. And some mortgage co's will lend on a non-owner occupied, you just have to find them. The bank we used is out of business now and it was sold to another mortgage co, Wells Fargo.As far as seller financing, we never had to have the seller create a wrap mortgage for us. Most of them wouldn't know how anyway. In one case, we contacted the bank and made arrangements to bring the mortgage current and make the payments until rehab was finished and sold. They were happy about not having to foreclose.In another instance, we used a title company who works with investors and we had them help us set up an escrow account from which we could make the payments and on their advice, we didn't record the deed until we re-sold the property so no red flag to the bank (which could also be done at the time of refinancing instead of selling). The title co helped us with the contract to make sure everybody was covered.I wouldn't advise you to make payments to the seller and leave it up to him to make payments to the bank. What if he doesn't make the payments and skips town with your money? There goes your whole deal.Using a title co and escrow account to make the payments ourselves worked out great for us because banks are used to working with escrow accounts and are unlikely to use Due on Sale clause unless they're not getting their money. That's all they really want in the end anyway.

Mitchell Pollard · Answer

@Caleb Heimsoth Thank you. Wrap arounds did come up in my research but it does seem very risky as the seller could take my monthly payments and not pay the original mortgage. Theres really no way to make sure they pay the mortgage. Hmmm.. Ok. Thanks man. I really appreciate it!

Greg Scott · Answer

Mitchell:Are you sure you will not qualify for a conventional loan?If you walk into most retail banks they will tell you know because all they understand is owner-occupied property. I'd talk to a mortgage broker that specializes in investment property. They will know that the property income helps you qualify for an investment property loan.Assuming you cannot get a loan there is a lot of work to do her. Seller financing is easiest when the seller owns the property free & clear and simply writes a mortgage to you as part of the sale. When he has an existing mortgage it gets a bit more complicated. I've never done a deal like this myself but I know there are a couple ways this could work. Research "subject to" loans where you take over the existing financing and then have the seller write you a second mortgageResearch "wrap around mortgage" where the seller bundles his loan and a second loan into one packageHonestly, I'd try for conventional financing if you can make it work. There are a lot of moving parts in these other solutions.

Greg Scott · Answer

sorry for the typos

David McReynolds · Answer

Look up Brian lregbu on YouTube How to buy houses with no money down

Caleb Heimsoth · Answer

You could potentially become an authorized user for the current owners mortgage account and just make those payments for them, but overall it’s just a lot of moving parts and may make your sale down the road (if you wanted to) a lot messier as well.

Jordan Page · Answer

@Mitchell Pollard Awesome question! This thread has been very helpful, as I am considering a similar game plan!Good luck to you, sir!