Seller/owner financing property help

[David Rutledge]

I have been looking at seller/owner financing as a way to build my long term rental portfolio and I was hoping some people on here may be able to shed some light on a few areas of this that I am a little unsure about.

Most of the deals I am finding still have an underlying mortgage on them and are not owned free and clear. I was under the impression that usually the lenders can call the loan due if the mortgage is assumed by someone else in a wrap around loan etc... Is there a way to get around this? Is it possible to have the seller finance the loan with a mortgage on the home while not having the loan called due? I heard something about dual insurance? This is all very foreign and confusing to me.

Also, the vast majority of the seller financed properties I am finding have a balloon payment after a few years. I will be unable to make the full payment in this short amount of time so I will need to refinance with a bank or other conventional lender. I already have a few mortgages with lenders and I know most lenders have a limit on the amount of mortgages you can have at any one time (usually 3 or 4) Is this the same when refinancing? Is there anything specific I should be aware of as far as the way lenders look at refinancing a property with a note carried by the owner as opposed to it being from another conventional lender?

I am planning to view some properties over the next few weeks with the hope of purchasing a few seller financed properties and I want to have as much information as I can before I make any decisions.

Any help or input on any of these issues would be extremely helpful.

Thanks so much.

David

[Don Konipol]

@David Rutledge, Good sense on your part to "worry" about things like how to pay off a balloon note, and how obtaining a mortgage affects your ability to borrow in the future.  Too many real estate "pundits" gloss over these potential problems.  

However, if you want to build a portfolio of properties without extensive credit , you will have to assume a greater degree of risk.  In my experience, owner financing comes in three forms.  First is the desperate seller who has to offer financing so there will be a greater pool of buyers.  This either assumes that the seller doesn't need the cash (but then why is he desperate?) or can sell the note at something approaching par.  So assuming we do not have a desperate situation, then the interest rate you end up paying can be significantly higher than a conventional loan.  I just seller financed a commercial property for a buyer who  put 25% down, and he's paying me 11% interest on the balance with a 2 year balloon against a 15 year amortization.

Second owner finance situation is when conventional financing is not available.  This usually means that in some way whatever the reason for the unavailability of conventional financing has to be corrected so that the property can be refinanced.  The seller's alternative in this case is to wait for an all cash buyer - or provide financing himself.

Third scenario is the seller who wants to get a higher price - higher than market - and uses seller financing to attract buyers who can not obtain financing from outside sources - and who are willing to pay a higher price for a property with "built in' financing.

As a purchaser, you should be looking for either (1) the highly motivated seller, (2) a property that can not be financed except by the seller - IF you can fix the problem (hint: a property next to a nuclear power plant is probably NOT a fixable problem!) or the VERY rare bird.....a seller who doesn't have any plans for the sales proceeds and considers a 20 year mortgage carry back at 5 or 6 % a nice income.