Seller Financing --> Refi Out

[Kevin W.]

Hi BP!

Longtime lurker, first time poster.
I was wondering if anyone could answer my question.
I wanted to buy a property via seller-financing. The asking price is very high considering the location, rents, and comps. So I wanted to structure it with 0% down, principal only payments for 250 payments (seller is interested).  

My question is that if I refinance out with a bank or lender in a few years and there is somehow amazing appreciation so that its more than my buying price, would I be able to just cash out the equity and continue paying the seller in monthly installments or would I have to immediately pay the seller to get his name off the lien for the property for the refi loan.

Thanks BP!

[Bill Gulley]

Kevin, I assume there is no underlying mortgage.

Seller financing does not add value to real estate, no more than alternative financing to the deal. You probably see the issue of the seller stealing your equity and appreciation.

If the seller is interested at his high price with a zero interest loan (where the seller will have imputed taxes for interest) the seller should be more interested in a lower price with interest.

His taxes will be higher with your thoughts, interest income will be lower than the gains on the sale most likely. Interest is an expense to you, still an expense but off set that with a lower price.

Sellers often get greedy offering seller financing, they need to be educated from what might seem to be obvious for them in that structuring their deal for what the place is worth with a reasonable interest rate is a bigger win for them in the long run.

As to future lenders, so long as your note is legal, they will simply look at the unpaid balance at the time of application and appraise the property to set the loan to value, if you and the property are all good, they fund the loan and payoff the lien.

Where seller finance contracts may be adjusted is when terms are not at reasonable market rates or where a conventional purchase would allocate much less toward the debt or purchase price. This can cause the established equity to be viewed differently in computing the loan to value, which may require a borrower to pay more down in order to meet the new loan requirement, but they will still be paying off that unpaid balance if those adjusted equities still meet the requirements......most often they won't as the buyer is usually not in a position to pay down the debt. This is more common, in fact a real factor in lease to own or option contracts but this approach may apply to any seller financed transaction.

Another point, predatory lending matters can be applied to any real estate loan, not just owner occupied under Dodd-Frank (DF). While DF does not apply to commercial loans, it does set a bar as a basis in determining what may be predatory practice. Predatory is charging more for the property than its market value should have been and financing that difference. Such a deal actually places your seller at higher risks if something were to happen to you and the deal is scrutinized later on. Educate your seller. Good luck :)