Can an Owner Carry financing option work when the seller has an existing Mortgage

Question

I found an off market deal yesterday. While attending an open house yesterday a neighbor and I began chatting and it turns out he wants to sell! He is house hacking a 2500 sqft 6 bed 3 bath with current rents at $6000 and the owner occupies one of the rooms. I see a path to increasing those rents considerably to $7500 by renting out the Primary room. Additional rent could come by converting two rooms of the home to ADU's I believe in that sinaro I could achieve $10000 in rents. I live in a very strong rental market with lots of demand and this home is within .5 miles to Cal Poly San Luis Obispo.

The Seller has a mortgage on this property $880,000

The Owner says he could carry The whole purchase. How could this work if he has a loan on the property?

His terms would be a purchase price of 1m, 7% down, 5% interest: My payment would be $5990.

It would be most Ideal for me to not come out of pocket on this deal as I will need money to do value adds.

Thank you all for your help in advance... This my first BP post...

Jonathan

Patrick McCandless · Answer

Sounds like a mess currently compared to how the conversation started. This would be your first deal? I'd be very cautious about this seller. Has he stated his reasoning for not involving a broker? I know people hate the idea of paying commissions, but as previous poster mentioned, why wouldn't he just list it for the $1.2M he believes it to be worth and have a broker handle the transaction professionally? He'd net a hell of a lot more than selling to you for $1M without commissions. Seems fishy. Are the additions permitted? Does everything look like it was done in a workmanlike manner? Do not skip inspections on something like this and do not be afraid to ask questions.

Caroline Gerardo · Answer

I assume owner is in bad financial trouble. They live in one room and housing payment PITI if their rate is 5% is $5626.If you are paying 7% down your PITI at 5 percent is $6931Owner is suggesting a wrap around I guess. Unless he has $890000 cash to pay it off, doubtful.Do not keep this person in the house. Are you taking them off title?Get title insurance more than likely owner is behind on payments/taxes/and there can be other liens. If owner files bankruptcy the loan gets into nightmare status. If owner gets sued they can lien the house. How do you plan to carry hazard/fire insurance?

Jonathan Olcott · Answer

@Janelle Eagle-Robles and Owen thank you for your replies. Heres an update. The owner is a little.. well all over the place. Last night he took owner carry off the table and agreed to a 1M purchase price if I can secure financing. I'm not sure where to start as he doesnt want a broker involved. The house has been cobbled together over the years, it has had 4 additions to the original home. @Owen Schwaegerle I attend the investor meetings you and ben host.

Owen Schwaegerle · Answer

@Jonathan Olcott that would be great to get him to pay off the loan as he suggested - it would make it much easier and cleaner for you to take title. Have you written him an offer yet? It would be best to get it written up with terms that work for you and to make sure that you are protected. In California, our standard CAR contracts do have an addendum for assumed mortgages and a seller financing addendum. These contracts have been vetted over by numerous attorneys and have protections in them to make sure you can purchase the property above board and be complicit with the law. Congrats on this opportunity! It sounds like a good one, and you may be able to turn it into a great deal!

Janelle K. Eagle · Answer

Hi @Jonathan Olcott - I’m a local investor And Realtor here in SLO. I own a rental near Poly and understand the potential value of a deal like this. Congrats on finding a great lead. I am curious why owner wants to sell off market. If he feels market value is $1.2MM, why would he sell for $200K under this? Even if he was trying to avoid paying a commission, that’s a big gap. Also - I have a hard time believing anyone who is naming their own price when selling an investment property. Getting a strong CMA is highly recommended. Does he just want the mortgage out of his name? Not want to be a landlord? Carry the risk? It’s just a little fishy that he would be willing to hand over a deal like this if he basically will net the same amount each month.Does he want to stay living in it after sale? looking for a new opportunity? Any sense of his motivation? Also - if I can be of help locally, please don’t hesitate to reach out.

Jonathan Olcott · Answer

Hello all, thank you for your replies! I have some updated information He is listed on the lease so he has access to the property without need for notice to the tenants. After discussing with the seller in more detail this evening I have learned the following. The seller is in good standing on the property and owes $330,000.He wants to get at least the same amount of cashflow on the property as he is currently receiving in the form of a mortgage payment his current rent roll is $6000 per month and can easily be $7500 if the primary bedroom was rented out.He is willing to pay off his loan so I can have a simplified owner finance deal. He feels that 1.2M is market value for his property and wants 6.5% interest It is possible to value add by way of adding an ADU with in the current footprint.I hope this all makes sense. What do you all think about this?

Eliott Elias · Answer

This would be called a wrap transaction. Know all the risks associated to doing this, Pace Morby is a good resource.

Steve Vaughan · Answer

@Jonathan Olcott. This would be a wrap-around mortgage or 'wrap'. Wraps around but is subordinate to the existing financing. Not for the brand new. Must do extensive title O&E and existing mortgage DD plus have a plan in case the mortgage gets called. They are notified whenever hazard insurance is changed. Rookies put insurance in their name vs get listed as additionally insured.