Seller Financing / Creative Strategies

[Trey R.]

I've done all conventional loans up until this point and am seeking a little input/guidance when it comes to more creative ways to finance a property.

I am attempting to purchase three homes from one seller.  They are selling for approximately $70k/each and the seller owes $50k on all three properties combined.  We have spoken and they said they wouldn't be opposed to seller financing.

Being that the current owner still owes money I know that the due on sale clause comes into play.  That made me think about possibly doing partial seller financing.  My main goal is to try and refinance them after 6 months.  We haven't talked rates or anything but a down payment of $15k was mentioned.

The seller is definitely motivated since they are moving so I'm trying to make something happen before another investor gets in the way.

Assuming each property is purchased at $70k that makes the total price $210,000. 20% of $210k is $42,000 which means I would need $27,000 from the seller to reach a 20% down payment if going through the bank. I would prefer to avoid banks completely but this was just an idea. I have also pondered the idea of using HML to get into the deal and then refinancing my way back out.

Anyone have any thoughts?

[Derek Dombeck]

There are many ways to do this, depending on the sellers goals.

1. Buy the properties subject to the sellers loans staying in place and have the sellers carry a 2nd mortgage for the balance minus what you agree on for a down payment. The challenges with subject to deals come up with the due on sale clause and the insurance. First, is their loan with a local bank, or a national bank? If it is local, you may be able to have a meeting and they may allow the deed to transfer ( I Doubt It ). If it is national, I would never contact them to ask permission. Just close the property in a trust. If the bank does a title search and sees a trust owns the property, they typically won't enforce due on sale and they can't see who is the beneficiary of the trust because that is not on file publicly. The insurance gets people in trouble because the insurance company must send notice to the lender when there are policy changes. Be sure to take out the policy in the name of the trust AND the sellers name with the acronym ATIMA, which stands for As Their Interest May Appear. This will let the lender think that the sellers are still involved, but in the event of an insurance claim, they will receive nothing because they don't have an interest in the property. 

2. Secure bank financing on 1 of the houses for $50,000 which would clear his debt. Then he can seller finance the other 2.

3. Lease the properties with an option to purchase in place. This is a way to avoid a due on sale issue but the seller still gets monthly income similar to if he seller finances. This is the best way to put off capital gains tax for the owner as well.

Happy Investing

Derek Dombeck