creative seller financing question

[Michael Richardson]

Hi guys,

I was wondering if anyone with experience on the seller side of seller financing had some insight on the following: I have a rental condo that I bought for $400K in 2009 and can probably sell now for around $500K. I have about $300K left on the mortgage. It's in a 7/1 ARM at 2.875% that won't adjust until 2020.

Even with the great interest rate, the property doesn't cash flow (San Diego), some of which is because the HOA keeps jacking up fees (now $500/month). I pretty much break even each month.

My renter is interested in buying the place, and I'm interested in selling.  I'm not sure if she would qualify for a bank loan based on her income, but she's never been late on her $2000 rent each month.  An additional twist here is that if I sell by the end of February, I will save probably $20K in taxes and won't have to do a 1031 exchange b/c I would have lived in the place for 2 of the last 5 years.  I guess this would be considering a wrap around mortgage since I'd try to keep paying on my mortgage - though I do have the ability to cover if they were to activate that rare due on sale clause.

So my questions are for anyone who has had experience in structuring seller financing deals:

1) My initial thought would be to structure it to parallel my own ARM to keep her payments low for 5 years (close to what she's been doing for rent) and have a balloon payment in 2020.

2) What kind of interest rates are usually charged in this situation?

3) If I sell the place, but still pay the mortgage in this wrap around strategy, am I officially off the hook tax-wise?

4) If at some point she stops making payments, the condo would go back to me (and my bank) as lien holders, right?  And even money that went toward her principle would be forfeited? I would essentially have to foreclose on her?

5) As the owner, she would now be responsible for HOA dues and insurance; would I still need to carry any insurance?

6) Who draws up paperwork for this kind of deal?  Seems like you would need a lawyer, an agent, and maybe even a banker.

Thanks in advance for your insight!

Michael