Lease Purchase vs. Owner Financing

[Cody Lekberg]

I'm looking to purchase a home and was planning on having the owner finance 1/2 of the purchase price. I figured that I would put 50% and then have the owner carry the remaining amount and then we would have a balloon payment after 3 years. We worked up the numbers and all seemed good. But then I found out that the 50% I was putting down wasn't enough to pay off their existing loan and leave them enough to put down on their next house. So they decided to do a lease purchase. In this scenario I would put less money down but pay more per month (to help them cover their mortgage payments and allow them to purchase their next house). That's all good to me, but it worries me to put a big chunk of money down, if their mortgage isn't paid off. Worst case scenario, they default on their mortgage (of the house I am lease purchasing) and the bank forecloses. Then I'm out of a house and a large down payment. 

I've asked several RE friends about this and no one has a great answer for me. I'll obviously run all of this through a RE attorney, but would like to have a good understanding of the ins and outs of this transaction. I want to make sure my money is safe and I'll be able to refinance out of this lease when I'm able to get a mortgage. (I'm a new Realtor so I can't get a mortgage right now). 

[Cody Lekberg]

Quote from @Michael J.:

Based on your situation, it appears that a "subject to" real estate deal might be a suitable solution for both you and the seller. Here's a possible scenario for taking over the property subject to the existing mortgage:

1. Consult with an experienced real estate attorney to help you draft a subject to agreement. This is crucial for ensuring that your interests are protected, and the terms of the deal are clearly outlined.

2. In the agreement, specify that you will be taking over the property subject to the existing mortgage. This means you'll be responsible for making the monthly mortgage payments on behalf of the seller, but the mortgage will remain in their name and the property is deeded over to you.

3. As part of the agreement, negotiate the terms for your down payment and monthly payments. You mentioned putting 50% down in the beginning.  Determine if that will cover their equity in the current house and that should help the seller facilitate the purchase of their next house.

4. To protect your interests, include in the agreement that you will use a 3rd party servicing company to make the payments to to ensure that they are going to the mortgage company.  This way, you'll have some protection from the seller defaulting on their mortgage and the property goes into foreclosure.

5. Additionally, include a clause in the agreement that allows you to refinance the property and obtain a new mortgage in your name once you're able to qualify for one. This will enable you to eventually remove the seller's mortgage from the equation.

6. Work closely with your real estate attorney to make sure that all the paperwork is done correctly.

 Wow! This is great. I know about Subject To, but you explained this better than I've ever heard. Thank you!