Contract for Deed Subject to Existing Financing

[Justin Pierce]

Ok, I'm going to give it a shot. I have always heard about subject-to-financing deals.  I've always been skeptical but a deal came to me that seemed perfect for this scenario.

Here's the deal:

I've been advertising in Tooele Utah (my home town) that I buy homes looking to pick up some rentals.  An owner called me who is 6 months behind on payments and looking at foreclosure.

The home would be worth about $130,000 after about $20-25k in fix up.  He owes about $80,000.  He's about $6,000 behind on his payments.  His interest rate is 3.75%.  The deal is just a little too tight to buy outright and try to flip.  And, 3.75% interest is way cheaper money than I could ever get as an investor.

So, I pitched him on seller financing subject to current financing. I will bring the $6k needed to bring the loan current and cover closing costs. The title will be transferred to me and the current loan and insurance will stay in his name. I will make payments of $600 PITI directly to lender. The home will rent for $1,000-$1,100. It will probably cost me about $8,000 to get it rent ready.

To my surprise, I called 2 title companies in the area and explained the deal and both of them said they could handle it, no problem.  I figured most title agents would tell me I'm crazy.

Right now I'm struggling to put together a contract that covers the deal.

Who's done a deal like this? Any advice?

[William Hochstedler]

Congrats on the deal.

A good title company should have the documents you need.  

You have three options:

He just quit claims the property to you and you continue making payments on the underlying.  In this scenario the seller has no recourse to get the property back if you fail to make payments on his loan.  Very bad for seller.

Your preference should be a promissory note secured by an All-Inclusive Trust Deed.  This will "wrap" the underlying mortgage into a new mortgage to you and gives the seller recourse of foreclosure if you fail to keep up your end of the bargain.

The third option is a Contract for Deed.  You have an interest in the property, but the title stays in the seller's name.  When the loan is paid off, the deed reverts to you much like a car loan.  This is much more advantageous for the seller as they can use eviction to reclaim possession of the property rather than the more cumbersome foreclosure needed in an AITD situation.  However, whether in practice an eviction can be successful, particularly if you've improved the property, is a question for an attorney.

Good luck!