How many owner carry contracts can a person have?

Question

I recently talked with a person that has a number of SFR and they would like to sale them on owner carry contracts but was informed they can only have 5 contracts of this kind.  Unfortunately they have five owner contracts now.  They were informed they would have to be considered a business to perform any more owner contracts, does anyone have any info on this situation?  Thanks in advance.

Jerel Ehlert · Answer

Account Closed "If the guy I sold to Stops making payments it trashes the original guy's credit. I have to do a foreclosure to recover the property. None of that hurts me much, but the guy I bought from gets his credit ruined with nothing he can do about it. I don't like putting people in that kind of scenario."This is absolutely, legally, wrong.  YOU must still make payments on the underlying mortgage whether or not your buyer makes payments to you.  "But I didn't assume the loan!" Irrelevant.  Assumption means getting the lender's permission.  You bought the property subject to the underlying financing.  You owe the former owner the obligation to make those payments.

You can be dragged into court in Texas and found civilly liable to the former owner for the payments and any damage those missed payments does to their credit report (and also attorney's fees to drag you into court).  Any lawyer in Texas will take that case on contingency because you have non-exempt assets.  That's an easy case for the former owner to win, too.

Criminally, I am aware of 5 cases across the US where investors have gone to jail when they intentionally fail to make payments on underlying mortgages when they buy sub-2.

If you buy on sub-2, sell on wrap or L/O, then walk away, your liability does not go way.

Joe S. · Answer

Already did discuss with an attorney. That's why I sold on a Wrap. Thanks. The problem is that as property taxes go up, it confuses the buyer why their payment went up. The other more serious problem when you buy using Subject To and sell on a Wrap is that you lose control.

When I take a property Subject To, the loan stays in the seller's name, which is fine since now I can refinance the property if ever he needs to be released from the loan.

However, once I sell to the new guy on a Wrap, and title goes to my buyer, I can't refinance the property any longer since I am no longer on title. Now, there's the problem. There isn't any way for the guy who's name is on the loan or for me, to refinance for a lower rate or to force sale of the property. If the guy I sold to Stops making payments it trashes the original guy's credit. I have to do a foreclosure to recover the property. None of that hurts me much, but the guy I bought from gets his credit ruined with nothing he can do about it. I don't like putting people in that kind of scenario.

With a Lease Option, I still own the property and I have the flexibility of refinancing to pay off the original note if it becomes an issue.

You summed it up pretty well. Not being able to refinance with the wrap as the seller is one of the major issues. I will say this if all possible we have continued to make the payments on the underlining loan if a wrap buyer stop paying. Whereas we know that we plan on getting the property back we try not to get the original seller stir it up due to someone stops making payments on the underlining loan. I have serval good friends that do not continue making payments on the underlining loan and according to them they tell the original seller  upfront that that could happen. I know that is a debate in and of it’s self so I’m not trying to open a can of worms.

Right. You can still make the payments on the original note to save the borrower's credit. The guarantee I make to the seller is that I will & have actually made those payments when necessary. In the event I have to do a foreclosure (with a Wrap), it is more costly and cumbersome than doing an eviction with a Lease Option. I have to carry the expense of continuing to make the payment, with no incoming offset and I have the expense of hiring an attorney for an eviction. That isn't a complaint, I'm a big boy and I play in the big boy arena, but it's just a fact of the type of investing I do.

The other part of the equation is that sometimes the seller is ready to buy a new place and it hurts his debt to income ratio if not handled properly. Some lenders will accept the offsetting payment in the calculation, but not all will.

The nice thing though, is if a big hail storm blows through, like one did a couple of days ago, it is the insurance and hassle of the Wrap buyer, not mine that deals with the issues. So, there are pros and cons. On a Lease Option it'd be my problem, not theirs.

I have used lease options before coming to Texas and I definitely prefer them over a wraps when it comes to me selling.

Joe S. · Answer

Already did discuss with an attorney. That's why I sold on a Wrap. Thanks. The problem is that as property taxes go up, it confuses the buyer why their payment went up. The other more serious problem when you buy using Subject To and sell on a Wrap is that you lose control.

When I take a property Subject To, the loan stays in the seller's name, which is fine since now I can refinance the property if ever he needs to be released from the loan.

However, once I sell to the new guy on a Wrap, and title goes to my buyer, I can't refinance the property any longer since I am no longer on title. Now, there's the problem. There isn't any way for the guy who's name is on the loan or for me, to refinance for a lower rate or to force sale of the property. If the guy I sold to Stops making payments it trashes the original guy's credit. I have to do a foreclosure to recover the property. None of that hurts me much, but the guy I bought from gets his credit ruined with nothing he can do about it. I don't like putting people in that kind of scenario.

With a Lease Option, I still own the property and I have the flexibility of refinancing to pay off the original note if it becomes an issue.

You summed it up pretty well. Not being able to refinance with the wrap as the seller is one of the major issues. I will say this if all possible we have continued to make the payments on the underlining loan if a wrap buyer stop paying. Whereas we know that we plan on getting the property back we try not to get the original seller stir it up due to someone stops making payments on the underlining loan. I have serval good friends that do not continue making payments on the underlining loan and according to them they tell the original seller  upfront that that could happen. I know that is a debate in and of it’s self so I’m not trying to open a can of worms.

Jerel Ehlert · Answer

Account Closed I'll spare you the sermon, but the short of it is this: in Texas, you are better off doing sub-2/wrap than L/O for lots of good reasons.  A good RE lawyer can go through the details if interested.

Joe S. · Answer

The seller simply does not understand or wants to limit 5 to each buyer. If that’s the case you’re good buddy here would be willing to take another five to help him out. 🙏🏽😁

Jerel Ehlert · Answer

And this mindset is why it was nuked in Texas.  If you are SELLING, you have duties to the buyer.  Selling on a wrap or L/O, and structure the transaction such that the other side will default, that's fraud.

Now you have to think in multiple dimensions.  You SOLD on a wrap.  What did you take back? A NOTE secured by a deed of trust.  You can sell the note or you can borrow against the note.  You will be required to retire the underlying note as part of the transaction, but you would have to do that if you held the property and refinanced.

If you want to keep title, rent it out.

Johnny Horner · Answer

Thanks mike I appreciate your input.

Account Closed · Answer

Can any of you explain why I would want to owner carry? I make over 16% roi on my long term rentals. Why would I owner carry to make 6 or 8%? I really want to understand this because I do have a mobile home up for sale that I would consider owner financing if someone can make me wrap my head around why it would make sense to do so.

Johnny Horner · Answer

@Mike Baxter

Could this be as simple as getting a prequalified letter from the lender for the amount of purchase?

How many owner carry contracts can a person have?

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