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Updated almost 4 years ago on . Most recent reply
Seller financing with a mortgage
We are speaking with a seller at that still owes $70000 on his property. We offered $100k cash and he is not interested. He said he would be interested in creative or seller financing. Is there anyway to do this without fear of due on clause from bank?
Any ideas would be appreciated!!
Thank you!
Most Popular Reply
@Nicole Dechow
So I recently bought a home with a mortgage using seller finance. The big issue is how to avoid due on sale clause. Here is what we did. In my scenario seller wanted what they owed which was 125k. Property is assessed at 156k. Bill and Debbie Smith are the sellers. Called my attorney and had him set up the smith family trust which is owned by my LLC. Had purchase contract written up and a couple other forms giving me authorization to talk to lender on the smith behalf etc. had closing with my title company (they did not call for a payoff but rather the see math to get approximate payoff) and we closed puttting property in the trust which I own and I took over payments. I love creative finance and getting deals done. I'm a licensed realtor in the Milwaukee market also. Good luck. The BEST advice is find out what the seller wants and why then try to find a solution. My sellers sale fell apart and they wanted to buy their dream home, didn't want to be landlords so this one worked this way. Ask a lot of questions and listen. Good luck!
I would probably let him lead the thought process. "How can I do that?" is a good question. He might have some ideas, or if he doesn't and can't see how to make it work, he might offer some alternatives. Find out what he really wants. Does he want an income? Does he have some other hidden agenda?
And keep asking. There are some really creative people here on BP.
@Nicole Dechow what's the property worth?
Would paying $70k down and seller financing the rest be an option? That pays his mortgage off and he can then carry the remaining with no issues
@Jason D. I did think about that but I wasn’t sure how we would pay our lender back the 70 then. If we put about 30k into it, it would be worth 170. We wanted to use it as a rental but are not opposed to flipping it. Our private money would want their money after about 6 months and he would probably want to hold the loan for a little while. Any ideas?
@Barry Pekin thanks for the advice! He wants 150 which is not reasonable for the current condition he also wants as much as possible without having to list it. Good ideas to try to keep getting to what he needs! I have to ask more questions!
@Nicole Dechow If you're fairly certain the property is worth $170k renovated and your rehab numbers are good at $30k, you can offer seller $106 with an inspection period to find any hidden issues and a no early payoff penalty so you can grrr after rehab. Confirm your lender's seasoning requirements are 6 months or less and you can refinance using the brrrr for $136k aas long as appraisal comes back at $170k ensuring your lender refinances at 80% LTV. Although, it is best to find out why seller desires to carry financing instead of just cashing out. I'd recommend using escrow company to ensure your payments are going to the mortgage if you aren't sure about seller's motivation.
Originally posted by @Nicole Dechow:
@Jason D. I did think about that but I wasn’t sure how we would pay our lender back the 70 then. If we put about 30k into it, it would be worth 170. We wanted to use it as a rental but are not opposed to flipping it. Our private money would want their money after about 6 months and he would probably want to hold the loan for a little while. Any ideas?
The scenario you described is best suited for a flip. I hate flips. (they are the riskiest and most highly taxed, but I digress.) Anyway, since you are using private money to buy with a 6 month time frame to pay back, that doesn't leave many options.
So, let's say he will sell for $110,000 on owner financing. You give him his agreed upon amount down, say $10,000. You then have a payment to him for $110,000 price - $10,000 down leaves $100,000 @ 6% is $600 a month plus tax and insurance closed through escrow with a title report and recording the transaction, there will be a note and a mortgage drawn up by escrow on a 30 year fixed due in 6 months (which is far too short of a time, you need a year at least, preferably more time on the owner financing if you are going to flip, to cover unforeseen circumstances and rehab time, sales time and any change in market time, but I digress again). So, when properly through escrow, you start making payments to him, he continues making payments to the bank as normal, (this should be done through a servicing agent, but yet once again I digress) typically on a land contract which doesn't get recorded until you pay him in full, but can be done Subject To, which is what I do. You do the rehab and sell the property and at payoff the new buyer's financing pays off the guy you are buying from, pays closing costs and the rest is yours.
So, working backward you say it will sell for $170,000 subtract the 6% real estate fees when you sell of $10,200 and closing costs of $1,800 and 6 months carrying costs of $4,000 = leaves $154,000 - rehab costs of $30,000 = $124,000 - underlying loan of $100,000 = $24,000 minus the $10,000 you put in as a down payment leaves $14,000 profit before taxes so then you divide by the number of hours you put in 4 months at 4 weeks each is 16 weeks @ 40 hrs a week is 640 hours so $14,000 profit divided by 640 hours equals $21.88 per hour. If you pay him any more than $110,000 the numbers don't work and it becomes a losing deal.
It is an "average" deal. The National Association of Realtors research shows that the average flip takes 6 months and nets $15,000 (Not worth the risk in my estimation.) However, it gets you into the game and I'm always for that.
@Account Closed he will owner finance for at least a few years but I was just worried about the due on sale clause with his mortgage. Can you do subject to and take over the mortgage and still pay extra? The owner wants more then 100k but that is all it’s worth right now so we are trying to figure out a way to get him more. Thank you!
Originally posted by @Nicole Dechow:
@Account Closed he will owner finance for at least a few years but I was just worried about the due on sale clause with his mortgage. Can you do subject to and take over the mortgage and still pay extra? The owner wants more then 100k but that is all it’s worth right now so we are trying to figure out a way to get him more. Thank you!
Done properly the DOS is not an issue. As long as the loan is paid on time every month the bank rarely cares. It just needs to be set up properly, and no you don't ask the bank for their permission, and yes If the loan is ever called there are several solutions.
My bigger concern was your comment "Our private money would want their money after about 6 months" - That creates the real problem, not the DOS.
@Account Closed I meant if we borrowed 70k cash from a private money lender to pay off the sellers loan.
So would we just give him an offer for seller financing and have our attorney wrote up the contract. What are the possibilities with due on sale. Thank you for your help. I just do not want to put the seller in a bad position.
Originally posted by @Nicole Dechow:
@Account Closed I meant if we borrowed 70k cash from a private money lender to pay off the sellers loan.
So would we just give him an offer for seller financing and have our attorney wrote up the contract. What are the possibilities with due on sale. Thank you for your help. I just do not want to put the seller in a bad position.
Basically, yes.
If the loan gets called they have to send a letter to the borrower and ask what the heck is going on. He gets to respond. This takes a month or two. Then they have to send notice which takes another month or two. During that time you can refinance, use hard money to pay it off, transfer it back to the borrower's name until the rehab is done, assume the mortgage, sell the property, work out an agreement with the lender and so on. They really don't want the property back if they can avoid it.
@Account Closed so with this scenario we could keep the property owner financed long term and just know our options in case it is called.
@Jeremy Roberts thank you!
@Nicole
Seller can put the property into a land trust, that does not trigger due on sale clause, then sell the land trust to you
@Nicole Dechow
You’ve got about a .03% chance of the DoS being exercised. Biggest reason this can happen is if you do the insurance improperly.
@rob
@Rob Milliken is this difficult for him to do? Would our attorney handle this for him and are there costs associated?
@Marshall Hooper what is the correct way to do the insurance? Would you list his mortgage company as the mortgagee?
@Nicole Dechow
Could you do a sub2 and take over his mortgage payments? If you get a due on sale clause happen to you, you could pay off the whole house in cash. I don’t know why he couldn’t take the cash and walk away. Hard to make a seller financing deal happen with a mortgage on the property.
@Nick Rutkowski he is convinced the property is worth more then it is because a realtor from his property management company (one of those pm companies that is huge in my area and does a terrible job) came in and told him he could get about 50k more then it’s worth. If you do subject to then can you also set up the contract to pay them extra?
@Nicole Dechow
His mortgage company is 1st mortgagee and they also need to be listed as Additional Insured
@Nicole Dechow
Yes. It’s called a Sub 2 with Seller Carry. He’d be in second lien position
@Nicole Dechow
So I recently bought a home with a mortgage using seller finance. The big issue is how to avoid due on sale clause. Here is what we did. In my scenario seller wanted what they owed which was 125k. Property is assessed at 156k. Bill and Debbie Smith are the sellers. Called my attorney and had him set up the smith family trust which is owned by my LLC. Had purchase contract written up and a couple other forms giving me authorization to talk to lender on the smith behalf etc. had closing with my title company (they did not call for a payoff but rather the see math to get approximate payoff) and we closed puttting property in the trust which I own and I took over payments. I love creative finance and getting deals done. I'm a licensed realtor in the Milwaukee market also. Good luck. The BEST advice is find out what the seller wants and why then try to find a solution. My sellers sale fell apart and they wanted to buy their dream home, didn't want to be landlords so this one worked this way. Ask a lot of questions and listen. Good luck!
I love creative solutions!
@Dennis Alsteen and @Rob Milliken,
Would a Land Trust trigger a taxable event for the seller, in particular, Capital Gains? Is title transferred right away or when the buyer pays in full?
@Nicole Dechow I recently took over a house using a Lease Purchase agreement. I don't have title nor was there a closing (yet) so no worry about the Due on Sale Clause.
This sounds like what you'd want to have setup for your situation. I'd recommend offering a lease purchase where you make payments to the owner each month. Start negotiations by saying you'll only pay his PITI (and cover any expenses that arise).
Have in the Lease Purchase Agreement that he will receive a balloon payment within 2 years or whatever time frame you want to put in the contract. He will receive his money when you sell the property or purchase it in your name.
All you will need is to send him his monthly PITI payment using whatever method you'd like (cash, check, Venmo, etc.). Use cash or credit card to fund the rehab. Then sell when rehab is complete or purchase in your name using a traditional lender.
@Dennis Alsteen and @Rob Milliken,
Would a Land Trust trigger a taxable event for the seller, in particular, Capital Gains? Is title transferred right away or when the buyer pays in full?