Is There A Way To Do Seller Financing On This Deal?

Question

I have a chance where I may be able to obtain a duplex from a very good friend of mine. His sister-in-law unexpectedly passed away about a month ago unfortunately.  My friend was named executor of the estate.  He asked me if I would be interested in buying it from the family since he knows I am getting into REI.  The family does not want to put it on the market if they don't have to.

The duplex is in a great location. It is in excellent condition with long term tenants.  It was bought in 2007 for $195,000.  It's current value is probably between $170,000 and $180,000.  The balance on the loan is $145,000.  It brings in $1,850 a month in rent with tenants paying all utilities minus water.  My question is not if the deal makes sense from a cash on cash perspective or anything like that, but rather is there a way we can structure a mutually beneficial deal for both parties whereby I would not have to get traditional bank financing and put down 25%?

I only have experience buying my personal residence and one investment property both with traditional bank financing.  I know the loan is not assumable, but is there any other way to do some kind of seller financing in this scenario?  I would be willing to pay my friend the difference between the property's fair market value (let's say $170,000) and how much is left on the loan ($145,000).  In essence, this would be like a $25,000 down payment.  However, I just don't want to go to a bank and have to put down about $40,000 plus for a down payment.  Can I do subject to financing in this scenario where the owner is recently deceased?  I'm guessing not, but my friend and I were both trying to figure out something that would work for both of us.  I am aware of the Due on Sale Clause in most traditional loans, but I would be able to refinance with no problem if the bank called the loan due. Also, even though we are very good friends, we would certainly have attorneys due all paperwork if we had a deal that made sense.  Any thoughts or suggestions would be appreciated?

Bill Gulley · Answer

Yes, if the administrator has the power of sale they can sell subject to the existing mortgage.

This should fly pretty well as the administrator can give the lender a copy of the death certificate and have your attorney provide a letter simply stating that "the property will be maintained as agreed. Payments shall be maintained by Darren Budahn for the benefit of the heirs."

I'd send that letter prior to settlement, I'd give possession prior to closing in the sale contract (where you can give your down payment as earnest money) and prolong closing as reasonable, like 90 days. This should give you 3 payments made from your account and beyond any initial question the lender may have. You're under no obligation to slam dunk this immediately. Their attorney may have more pressing requirements to close the estate, but they can do that with the administrator and settle the estate, then sell.

If the lender inquires about you, don't lie about it, but I doubt they will. If you get past the first year, you'll be in a refinance mode rather than that for a purchase money loan, avoiding the down payment issue. I also suggest you contact your bank and ensure that you can refinance the non-owner occupied property and at what LTV. If you don't have sufficient equity you'll then need to bring the existing loan down to the amount that can be refinanced.

Sounds like a good arrangement dealing with friends.

Have this done by your attorney, Also tell them Bill said (LOL) that a "partitioned note" can be used breaking down principal amounts to different beneficiaries as the holder with principal and interest being due each, that constitute a total note payment of the sum required as the full payment. Also state the note may not be sold without consent of all holders. Give one holder the POA to administer the note with a named trustee under the security agreement.

These features can help those heirs in the event they die or become incapacitated, as their share becomes part of their estate, Another point is that if they ever require medical benefits and must qualify for assistance, one holder won't be tagged with the entire balance owing, as they may be and can fail to qualify until that asset is "spent down" for the applicants benefit.

The restriction to the sale of the note makes it rather unmarketable, if any assistance program or other action requires the note to be valued at it's market value, the resulting value may not exist or must be evaluated significantly lower.

There you go, see your attorney and have him send me a grand. LOL

Darren Budahn · Answer

Thanks for the reply Rick.  Yeah, my first order of business will be getting an experienced attorney to draw this up for me as I have no experience at this point with deals like this.

My friend's (seller) only concern is that he wants to be done with the property completely. And while he ideally wants to sell to me, he doesn't want there to be any kind of risk to the estate with a "subject to" type deal.  My understanding is that once title is transferred to me and I pay the seller his equity that they no longer have anything to do with the property and thus there is zero risk to seller at this point.  Would this assumption of mine be accurate?

And then my only concern is having the bank call the loan due, in which case I would have to refinance.

Rick H. · Answer

I've done exactly what you're trying to do many times.

Bill may have over-answered your query. There are two parts to structuring your deal:

1) Taking over a decedent's loan subject-to will not be much different from a living owner. Bill gave you a few steps. Make sure you get an authorization to to release info along with decedent's SSN because you will need it to deal with lender/loan servicer occasionally.

2) Structure the equity part of the deal as you might with any other deal. If you were in a trust deed state you could name an entity that you control as trustee for later control of the note to heirs.

I have never heard the term 'partitioned note' used, however I like it and will ethically swipe it for deals in future that fit what have been multi note bene purchase money carry back deals. This could solve the challenge of what is typically a fractionalized loan. In past, we have worked with multiple notes secured by a single security instrument to allow flexibility.

Darren Budahn · Answer

Lol.  I'll make sure I give the attorney your exact quote Bill.  I had to read it 3 times just to  wrap my head around it.

So even though the bank will know that the mortgage holder is deceased, they will MOST LIKELY have no problem with me taking over mortgage payments?  (Even though the mortgage is not FHA or VA and therefore not technically "assumable?")

Darren Budahn · Answer

Thanks for the reply.  In both cases, title is still transferred to me correct?  I would be willing to pay them the full amount of equity since it isn't very much.

If I am making payments directly to the bank, what are the chances that they say are going to have a problem with this?

Joe P. · Answer

You can do a subject to transaction on this. It doesn't matter if the the owner is deceased. Find an attorney to draw it up for you.

Brandon M. · Answer

Darren,

Seller financing/subject to financing sounds like the way to go. Either you give them a small amount to allow you to take over the loan subject to the existing terms, or you make them an offer where you pay a certain amount down and pay them a monthly payment going forward. If you do seller financing you can have a lawyer draw up a new mortgage/note for a few hundred dollars.

Keeping it off the market will allow the seller to save themselves the 6% that would be paid to an agent, so you can try to sell them on the idea of seller financing vs listing it with someone.

If the seller is agreeable to a 10-20% down deal and then financing the rest, this sounds most ideal for all parties.

Is There A Way To Do Seller Financing On This Deal?

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