Selling my first house and carrying the mortgage

Buying & Selling Real Estate
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Selling my first house and carrying the mortgage

Scott Armstrong
Chester, NY · Member since 2013 · 8 posts · 0 votes

Hello,

I've done a lot of looking around and have read many different posts but have not seen anything that closely resembles my situation. I'll try and lay it all out but if I miss something please feel free to ask. Thanks upfront for all your replies/thoughts.

I have a house that I'm planning on selling to some friends.
I still have a BOA mortgage w/ 21 more years on it (technically, but I know I'm ahead on that) that I plan on keeping and paying down as quickly as I can afford.
My friends have almost no money to put down and I'm planning financing them.
I have a lawyer who I've used twice in the past for traditional purchases (one bank financed, one cash) and she assures me this is not a difficult thing.

My friends have agreed to my asking price and my terms of the loan.
We are getting a small premium on the sales price of the home and are loaning them the $110,000 at 6% over 30 years.

We still owe about $75,000 of the original $91,500 BOA mortgage which is at 5.875%.

I talked to my Allstate agent and she said we'd have to switch from homeowners to a Landlord policy.

First question, does this sound like a fair deal for both parties? Mind you I'm not trying to get rich I'm just trying to strike a fair deal and get rid of a house that I just don't want to deal with anymore.

Secondly, what type of sale would be best so that we may keep the current BOA mortgage and retain possession of the property in case they fail to pay. (totally not worried about that but want to be covered, just in case).

Lastly, does that sound right about the insurance? Also should we or can we require them to carry renters insurance even if they're not renting but buying with some type of deal that keeps title until they are paid in full?

Any other advice you think I should know please feel free to share.
I'll keep reading around the forums in the mean time.

Thanks!
Scott

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    First, can they get a loan if they had the down payment. If they had equity could they get a new loan?

    It's a bad idea financing friends, even worse financing anyone for 30 years. SF rarely goes past 5 years.

    You also need to check on the issues with the SAFE Act, getting a mortgage originator involved is a good thing to do anyway. Attorneys usually are not finance folks.'

    Drafting a note is not difficult, closing is not hard, but if that's all your attorney had to say I say get another opinion. Do you live there now?

    If you do any financing I suggest you get a mortgage servicer.

    Depends on how you sell, A Sub-2 passes title, a contract-for-deed does not. In either case you insurance agent is not right, selling means you are not a landlord, you become an additional insured or as a lien holder on the buyer's policy, or you add them as an additional insured on your policy. Due to there being bank financing and especially with BoA, any change of insurance will be a red flag to the lender.

    Your attorney didn't mention the due on sale in your mortgage? Usually the first thing out of thier mouth, the bank can call your loan due, so be prepaird to pay them off.

    I suggest you do some searching here on seller financing, Sub-to (2) and wrap financing. You should really study this well before getting involved in it. And, if you do a short term deal you might use an option, but that is not a good way to go long term. :)

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  • Scott Armstrong
    OP
    Chester, NY · Member since 2013 · 8 posts · 0 votes
    13y

    Hey Bill,

    Thanks for the quick reply.
    I realize this is a highly unusual deal that's why I was asking for opinions.

    They may or may not be able to get a loan easily because we all work in the entertainment business and have many different short term employers every year. Last year for example I had 20 different W2's and 2-1099's and I assume he will be in a similar situation this coming year as he just left a long term employment position for the greener fields of freelance. Freelancing pays a lot more if you're properly motivated and since I know most of my friends work history and know that he is a hard worker who has a IATSE local one union card in NYC, that he will certainly be able to afford the payments.

    Secondly he has improved greatly the value of everywhere he has ever rented at his own expense because he likes to do fix it stuff in his downtime and this property needs some serious updating/fixing which he is capable of.

    Also if I were to try and sell it outright I could probably only get maybe $90-100k for it. So in addition to the 10k+ price premium I'm looking at the potential ~$100k interest as a main motivation for making this deal. I have no worries about them walking away because I'm sure they won't and secondly if I have the deal structured right I will retain the title until it's paid in full.

    I don't live there now, but I do live close by since I bought another place with cash during the downturn.

    My lawyer (who I spoke to only briefly) did mention Contract for deed and due on sale, which I was already aware of, which is why I want to structure it so I can keep making the payments on the BOA mortgage and not have to pay it in full because right now I can't afford to pay off the ~75k we still owe.

    I will look up sub-to(2) and do some more reading about wrap, which didn't seem to be exactly what I was thinking.

    Thanks again.
    Scott

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    13y

    Bill is dead on this one, the very first thing I thought about was the Due on Sale Clause. The second, I would get the advice from another attorney. There are some major issues that seem to have been overlooked.

    Bill would know this, but I have heard that even a Lease with Option to Buy can trigger the Due on Sale Clause.

    In any case, let it be known the lender has staff attorneys. You are facing very deep pockets should a challenge arise.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    The interest rate spread it too tiny IMO - 5.875% on the one side, 6% on the other side. The banks get more of a spread than that; these days you're lucky to get 0.8%, but the bank is charging over 3% on the loans. You should try to get to something closer to 8%.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Two points then, one, you could have fifty W-2s in one year, no problem if the borrower is in the same line or work for 2 years and the income quaifies as this can be considered "full-part-time" employment, that is also customary in the industry. So he may be ale to obtain a loan. The other point, the premium at 10K is the max at a solid 100K or 10% in a 3/4 year contract for deed. If the property is really worth say 90/95K, your "friend" won't have the equity for the place to appraise at that higher value. Such dealing can be considered predatory. Providing seller financing does not add value to ay property above what other financing would cost in a deal. So you coul be dinging him as much as 20K on a 90K property. If he improves the property the value should be in his pocket, so eventually he will probably figure it out.

    With the contract for deed, ifthe bank calls the loan you'll be responsible to cover it, it won't affect your agreement to provide good title under your agreement. :)

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  • Scott Armstrong
    OP
    Chester, NY · Member since 2013 · 8 posts · 0 votes
    13y

    Thanks again Bill. I really appreciate the information you've given.

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  • Scott Armstrong
    OP
    Chester, NY · Member since 2013 · 8 posts · 0 votes
    13y

    A couple more points/questions.

    One, I wish I knew about this board ten years ago when I was looking for my first mortgage. I got quite the run around about my employment situation regardless of my fairly high income to expense/price of house ratio. I was told when we got our mortgage that it was my income combined with my GF at the time employment history (long term solid employment) that qualified us for the mortgage. Looking back that seems maybe not to have actually been the case and I've been under the wrong impression for all these years.

    Secondly, friends have less than 2k to spend upfront. I'd happily lower the sales price to avoid any predatory lending. I have no intention of doing anything but a fair deal. I just thought that for me this deal is great. It gets rid of a house I don't want to deal with, it helps out a hard working, good guy buddy and it pays me 6% for 30 years. I still don't fully understand why it's not a great deal, considering most of my savings are earning much less than that. Granted I have a pretty conservative investment strategy.

    Also, can anyone recommend a loan originator in my area?

    Lastly, I fully trust that my lawyer will do the job right and protect me, but we talked once for less than a minute so obviously we didn't cover all the bases. If after I met with her next week she doesn't seem up to the task I have no problems going elsewhere but she has been practicing RE law for 20+ years in this area.

    Thanks again.
    Scott

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    13y

    If you charish your friendship, do NOT provide the financing for a long list of issues.

    In in particular, you must treat them as if they are strangers when it comes to collecting payments and taking care of the collateral. "Grace Periods" are one thing, a friend's grace period can be a problem.

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