How to structure seller financing deal

[Sandy D.]

I own a five unit MF in Huntsville, TX on 10 acres.  I am a newbie and this is my first and only investment property.  Someone wants to purchase using seller finance so his daughter can live across the street from him.  How do I structure this deal when it still has debt service and rental income?

I bet any of you can offer some kind of guidance here and it will definitely help me - good, bad, or ugly.  I can offer number if anyone is willing to crunch numbers with me.  Thanks!!

[Marco Bario]

Originally posted by @Sandy D.:

I own a five unit MF in Huntsville, TX on 10 acres.  I am a newbie and this is my first and only investment property.  Someone wants to purchase using seller finance so his daughter can live across the street from him.  How do I structure this deal when it still has debt service and rental income?

I bet any of you can offer some kind of guidance here and it will definitely help me - good, bad, or ugly.  I can offer number if anyone is willing to crunch numbers with me.  Thanks!!
 

The structure:

1. Existing debt stays in place, and you remain as the borrower. 
2. Wrap the existing loan in a new loan to your buyer. These are called wraparound loans. The buyer pays you each month, you pay the underlying loan. 
3. The buyer will give you a promissory note and deed of trust. The deed of trust is recorded with the county recorder. Your attorney will actually draft these.
4. The buyer will also give you an "assignment of leases and rents" which entitles you to rental income in the event they do not make note payments to you. 
5. Upon closing, engage a licensed loan servicer to collect borrower payments, make payments to your lender, deposit the difference each month to your account, issue tax reporting, and ensure general legal compliance. 
6. Require that your borrower obtain insurance which names your lender as the first loss payee and you as the second loss payee. 

Tips:

• Texas recently passed new legislation concerning wrap lending. You need an attorney to structure these anyway. Ask yours about the new legislation and make sure they're up to speed on it. 
• The loan to your buyer should have a higher interest rate, larger monthly payment, and longer term than the number of payments remaining on the underlying loan.
• Most investment property is held in an LLC or other business entity. Insist that your borrower also provides a personal guarantee so that they are personally liable in the event of default.