How to structure this deal?

Question

A FSBO was offered to me with owner financing, but the seller does not own the property free and clear.  What are some different options for structuring this type of deal?  I told him that I would want financing for at least 5 years because he said he couldn't finance for very long.  His asking price is 101,900.  According to Rentometer.com, the median rental for the area is $875 (20% of rentals are above $1150/mo. and 20% of rentals are below $700/mo.).  Any help is appreciated.

Kevin McGarrey · Answer

Can someone go over sample exist strategies?  So now I "own" the property and am paying the mortgage, what next?  For example, B/S agree on a sales price of $100k for a property with a $50k mortgage on it (assuming the house is worth $150k so the deal works).  When do I pay S the other $50k?

Bill Gulley · Answer

You can write a purchase agreement that also contains financing terms, much like a contract for deed, however it's easier to use a note and close. I have used the contract when there were other issues to address, such as repairs being made and completed in several months, or clearing other liens by the seller or commercial/business transactions with contingencies. I suggest you see your attorney, again, who will guide you as to local customs. Good luck!

Tony Colquett · Answer

Thanks, guys.  Bill, I believe I understand the mechanics of the second option (sub2 with second mortgage) but I don't quite understand what you mean by "contract including financing".  How is that worded in a sub2 contract?  Also, what do you mean by "That is also if the seller lives in the property, OO, such deals are usually exempt from new lending regulations"?  I definitely will read up on sub2 deals here on BP.  Thanks again for the help.

Craig P. · Answer

I agree lots of verbiage but really we just try to cover all bases.  This is stuff we put in an addendum not the actual purchase agreement as I stated above.

Again we are not attorneys thus the reason why I stated you may want to discuss this with counsel in your area.  We have closed many sub to transactions however.

One point of clarification....if we were to market or wholesale a house we had under contract with agreement on "sub to".  We would not leave that in place for the end buyer as I would not have confidence that the person buying would follow through on payments, etc.  Just my view.

Lots of good advice in this forum.

Bill Gulley · Answer

That sure is alot of verbage and IMO the marketing spin doesn't belone in a purchase agreement. Asking for the right to market any property before an interest is taken as a principal may likely put you in a position as a real estate agent. If you have no equitable interest in a property, such as in an i nstallment contract that has already closed, you are asking the seller to allow you to sell or lease the property for their benefit which is the duty of a real estate agent.

I suggest you get an attorney who is familiar with local customs and state laws where you are, if not to draft your agreements, at least to review anything before you use other contractual language/contracts. Good luck...

Craig P. · Answer

Write your PA "subject to:" existing financing.  You'll want to make sure you cover your bases with disclosures that clarify exactly what you are doing.

We add the following language in a sub to addendum:

The closing transation will take place as a "Subject to Transaction", meaning the seller agrees to leave existing financing and other potential liens in place for buyer.  Buyer will assume payment responsibilty upon successful closing, deed transfer and will make all payments from that point forward.  Payments will be made on time by due date.
Seller understands that buyer has full payment responsibility and that the loan will remain in sellers name until buyer successfully pays off the loan or refinances following the renovation or rental period.  
The buyer may immediately turn around and sell the home for a profit.  The buyer may fully renovate the home first and based on market conditions or the buyer may be required to rent the home for an extended period or until the market improves.  The buyer may also re-sell the property with existing financing based on marketability, changes in the neighborhood, the market and potential buyer demand.
Seller understands that credit may be affected negatively if the buyer misses one or several payments. 
Seller understands that buyer may deed the house back to sell at some later point and based on mutual understanding amongst buyer and seller.
Seller understands that this could be a permanent solution to the property problem and disposition or this could end up being a short term solution based on worst-case scenario outcome, i.e. something catastrophic occurs that keeps the buyer from making payments.    
The buyer has the seller’s permission to begin marketing the property immediately and by whatever means deemed necessary by the buyer.  This could include but, is not limited to the following: phone, email, regual mail, NTREIS, MLS, signage, or regual listing wherey the agent is only marketing the property and NOT representing the seller in any way
The parties are encouraged to get tax and legal advice and by signing this agreement they are agreeing that they have explored other options, sought council and done their due diligence.     
_____________________________________	___________________________________
Buyer							Seller
_____________________________________	___________________________________
Buyer							Seller

You also want to get the following documents signed:
-Limited POA
-Due on sale acknowledgement
-Sub to change of address 
-Escrow and refund authorization

We are not attorneys thus you may want to speak to counsel in your area to determine laws/regulations in your area relative to sub to.

Let me know if you have any questions.
Good luck.

Bill Gulley · Answer

Tony, the sub-2 can be done either by contract including financing or simpler, with the assumption of payments of the underlying mortgage and a second mortgage. The second can be set to provide an amortized full payment within the time requirements of the seller or with a balloon payment which will most likely require you to refinance. That is also if the seller lives in the property, OO, such deals are usually exempt from new lending regulations. Double check in your area. Since this is a first for you I suggest you see an attorney to assist. Read up on Sub-2 deals here and you'll get a good idea of what is involved. Good luck

Tony Colquett · Answer

I'm not quite sure I understand how a Sub2 works.  Could you please explain it to me in relation to this example?  The way I understand Sub2 contracts is that you take over the payments on the existing mortgage.  This type of contract seems fine for a desperate seller but I don't think the seller is desperate in this case.  How could you give a non-motivated seller over and above the amount on their existing mortgage (minus repairs) with a Sub2 contract?  I would much rather use a Sub2 since I would get title.  I understand how the Contract for Deed works.  Thanks for your help!

Ramon Jenkins · Answer

I agree with @Bill Gulley

I have not done any personal seller fiancé deals yet ,, fyi

Here a thread of latest subject-to ( conversation )
www.biggerpockets.com/forums/50/topics/75613-subject-to---escrow-closing-or-not

If I was you I would send a pm to @Michael Quarles

or search bigger pockets for subject-to or land contracts

Regardless make sure numbers work out for you long-term

Bill Gulley · Answer

Sounds like a Subject-to or a Contract For Deed, assuming you don't just want a master lease with an option. The rents right now are irrelevant until you figure out how you want to hold title or an equitable interest.

It seems too that your deal should be based on your ability to take this deal out, what's the exit, your intentions of holding and for how long?