Structuring Buy w/Contract For Deed when Seller Has a Mortgage

[Matthew Haskins]

I am looking at purchasing a property using Contract For Deed while the seller still has a mortgage on the property. 

This would be my first Contract for Deed transaction so I have been taking tips from others in my area who have done it before. I find myself conflicted though on how it should be structured.

Here are the general numbers:

• Buying Numbers
  • 88,000 Purchase Price
  • 2,000 Down payment
  • 775 Monthly Payment
  • 10 Year term
  • 1250 per month rent
• Sellers Current Situation
  • 97,000 home present value
  • 88,000 owed on home
  • 760 monthly payment (paying too much for insurance, will be 720)

Here is how I was told the process would work and why I am confused:

The down payment is paid at closing and goes toward the total purchase price of 88,000. The monthly payments that I am making are NOT going towards the final purchase price of 88,000. I rent the property at $1250 a month and cash flow $475 a month or I sell the property on a new contract for deed at $105,000 with $5,000 down, and $1500 a month payments for a 5 year term. Obviously both of those situations make me money in theory and in this simple of an explanation.

The part that throws me off from how others explained it to me is that my monthly payment is not decreasing my total amount owed. So in this scenario, why doesn't a guy just buy the property for say 90,000 (88,000 for mortgage payoff + 2000 to help seller move) and just use a new mortgage? (Ignore the fact that lenders don't usually borrow under 100k, and that I may not be able to take out more mortgages). 

Wouldn't this be a better deal? My monthly payment would be about the same. I planned on paying the sellers closing costs in both scenarios, I can rent it for the same amount regardless, I pretty much take on the same amount of debt, but at least some of my monthly payment is going toward my end debt

Maybe it is simpler to ask...

How would you structure a deal given a motivated seller with a house that costs 775 a month and could be rented at 1250 a month?