With the $0 cash down seller finance and/or subject to, the seller gets no lump sum?

Question

Just listened to the Pace Morby episodes on the regular and rookie podcasts. Really fascinating stuff but I'm still trying to wrap my mind around a dew details.

Mainly, in the scenario described where it's a zero cash sale and the owner has a lot of equity, the seller is not walking away with any kind of lump sum like they ideally would in a traditional sale, correct? (Unless the seller negotiates for a certain amount down, at which point it would not be a zero cash down sale by definition). Instead, the seller is financing their own equity back to the buyer over an agreed upon amount of time, and if there is still a mortgage the buyer is also assuming the remainder of the loan?

Do I have it right?

Steve Vaughan · Answer

@Jon Martin. In theory you're correct, but I'd rather spend time saving a few bucks than waste time trying to do a later disregarded,  unicorn transaction.

Disregarded? Consideration must be exchanged for a RE transaction to be legal.  The seller or their people can come back later and undo for trading in bad faith.

Plus every transaction has closing costs, recording and title fees, transfer or excise taxes, etc.   You'll have to convince a seller to not only receive no money at closing, but pay for the privilege out of pocket.

I did an essentially $0 to me sale last year. The buyer paid the $22k in closing costs (larger transaction) but I wanted to net nothing for tax reasons.

I pretty much always put down 10% for my SF or sub2 purchases. These were 80% of my portfolio. If I insisted on 0% down I would have purchased nothing over 20 years. I later got all invested back+ easily, but it took time. Save some $ and forget $0 down nonsense.

One exception may be a commercial MF with lots of security deposits.    Technically those $ stay in trust, but could be a 'credit to buyer' on the settlement sheet.

Chris Davidson · Answer

@Jon Martin like others posted in the thread yes with zero down the seller gets nothing, and in reality pays to give you the property on debt unless you pay all closing cost. But like @Steve Vaughan said these are unicorns and if you want to make progress save up a bit and put a little down and make things happen. You also will have a better cushion and buffer for when things go sideways.

Cheers!

Tom S. · Answer

@Jon Martin  The seller gets compensated by the interest on their loan to you, the buyer.  So if the purchase price is $200k at 6% for 30 years, and the seller is able to wait all 30 years to collect, they receive $231k interest on the loan.  Or $431k total.

The reality is that most sellers won't or can't wait the full 30 years, so most loans are amortized at 30 years but with a 5 or 7 year balloon payment (the balance is due in full at that time).

I've done a number of seller financed deals as a buyer and those would be typical terms.  And the 0% down is very, very rare.  10-20% down is more common.

Eliott Elias · Answer

In the scenario where the buyer puts nothing down, you are correct. The seller gets to capture whatever value they requested, and the buyer gets to be no money out of pocket. If there is an existing loan, the buyer will take over payments without putting the loan in their name.

Edward Stephens · Answer

Good question.

The original loan remains in place and is assumed or otherwise taken over subject-to.

Then another loan is originated for the seller’s equity (the difference between the purchase price and the original loan balance).  This is the loan you pay to seller directly.

Feel free to DM me if you need additional clarification or help with this.

Edward Stephens · Answer

Just responded.  Hope to connect with you through DM!

Jon Martin · Answer

Thank you all for the replies. For the record I am not going this route in the near future, simply trying to understand. The reason I asked is because the aspect of how the seller gets compensated for the equity was not adequately covered IMO in the podcast episode.

Eddie Francis · Answer

@Edward Stephens I just requested to connect with you. I have a few questions and you seem to be the guy that might be able to help.

Brett Chupka · Answer

The only thing I want to point out is you're not technically "assuming" the loan. When someones assumes the loan, I believe that means their name is actually transferred off the loan and is hence no longer responsible.

With a sub2, the sellers name is staying on the mortgage and you are just taking over payments direct to their bank. The seller still has risk in that situation.

With the $0 cash down seller finance and/or subject to, the seller gets no lump sum?

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