Ways to structure a seller finance deal

[Ryan Cleary]

I have a property I would like to sell:

-Market value: 450,000

-Purchased in 2020

- Mortgage has $153k left at 4% (conventional)

The market is slowing down a bit and since I no longer would qualify for conventional loans, I am considering offering seller financing to generate some interest and get the best sale price.

I would love some ideas of how to structure this properly. 

To my knowledge, it is better to have a buyer assume the mortgage, I just dont know how the rest of the terms would be.

[Nicholas L.]

@Ryan Cleary is the mortgage truly assumable?  Most mortgages aren't.

Without paying off the mortgage it would be a sub-to deal and I think risky for everyone involved

[Chris Seveney]

@Ryan Cleary

Most mortgages are not assumable. You would need to sell it subject to thus your name would stay in the loan. Seller financing does not always sell for more money and if there are big price declines then you may end up having to foreclose

My recommendation is to sell it with borrower getting traditional financing and put that $ in a tax friendlier account than loan interest = ordinary income rates

[Robert Malcolm]

Hi Ryan, I think I can help out here. I just sent over a private message. Thanks. 

[Richard Chover]

Rather than selling the property right now, you could consider doing a lease option.  Benefits:

-Beneficial tax implication since you won't be realizing your gain.

-You remain on title.

-Charge an option fee 3-5% to get some cash-in-hand.

-Collect rent that is similar to what their payment would be; which will be much higher than your current mortgage. (This is probably what you are interested in here.)

-Most leasees never exercise so 3 to 5 years from now... you keep the option fee, and had the benefit of rent that was probably above the market rate for your area.

The drawback is that you don't get the ~$250k(after selling expenses) to play with. 

You mention that you don't qualify for traditional financing.  If that is your biggest concern, then buy something that is <$500k put 50% down and you will have loan options, just not conventional.

[Joshua Christensen]

Quote from @Ryan Cleary:

I have a property I would like to sell:

-Market value: 450,000

-Purchased in 2020

- Mortgage has $153k left at 4% (conventional)

The market is slowing down a bit and since I no longer would qualify for conventional loans, I am considering offering seller financing to generate some interest and get the best sale price.

I would love some ideas of how to structure this properly. 

To my knowledge, it is better to have a buyer assume the mortgage, I just dont know how the rest of the terms would be.

 Hey Ryan,

I do a lot of seller financing deals with the mortgage staying in place (ie. Subto).  In New Mexico we call them wraps.  Not a big deal.  

The risk involved is the Due on Sale Clause in the underlying mortgage.  Although it does present risk, the attorneys I work with explained it to me like this.  Essentially, it is not an automatic thing.  The due on Sale is there to allow the bank to call the note due should they feel it is necessary to do so.  The escrow company and attorney I work with have seen this exercised 1 time in 30 years.  The reason was due to non-payment.

To protect yourself as the seller, it is advised to make a payment and stay at least 1 payment ahead of your buyer at all times.  The escrow company will not see your underlying loan, so they won't know and it is up to you as the seller to keep your mortgage current.  

Second, ALWAYS utilize a third party escrow company to keep the transaction as arm's length for the purpose of records and refinance with the bank later to buy you out.  

Third, Get a good downpayment.  The higher the downpayment, you shift risk to the buyer and reduce your risk.  Give them something to lose if they don't make payments.  That's why banks ask for down payments.  Statistically, 20% down dramatically reduces the risk of foreclosure.

TERMS:

Interest rates: Some people like to raise their interest rates higher than what a person can get at the bank.  This attracts people who can't get bank loans increasing your risk as the seller.  I recommend charging more than you pay and less than the going market rate at a bank.  Make it attractive to buyers and you'll be more likely to get a better / performing buyer.

Down Payment:  I always ask for a minimum of 10% up to 20%.  Cover your costs and make sure you're getting some walking cash.

Term:  I like interest-only payments.  As a seller, 100% of their payment goes to your bottom line.  Cover your mortgage and then pocket the remaining interest.  When they refinance, they will still owe the original principal balance.  You maximize your earnings.

Need the cash:  In the event you need the cash, there are note buyers out there who will buy your contract.  Usually at some kind of discounted price.  The nice thing is that even with a little haircut, they are portable if push comes to shove.  

WHAT I LOVE AS A SELLER:

I hate that I am selling an asset with potential to pay me monthly.  With owner financing, I can actually convert my property asset into a note asset and still get paid.  I have no maintenance to worry about, no monthly rent collections, and my capital gains are pushed further down the road.  In the estimates I've run, an average $350k house will earn roughly 30% more than a traditional sale in additional interest over a 5 year period.  You will convert from normal income (rental) to interest income which is taxed differently.  Your real estate note becomes truly passive.

If you don't need the cash from the sale and can let it ride, then this is a great tool for additional growth in your portfolio.

[Ryan Cleary]

@Joshua Christensen This is very helpful!

[Joshua Christensen]

Quote from @Ryan Cleary:

@Joshua Christensen This is very helpful!

 Glad to add some value.