Question about Notes - First Timer here

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Question about Notes - First Timer here

Steve S.
Dallas, TX · Member since 2014 · 650 posts · 53 votes

Anything I've ever learned regarding money has typically cost me money.

I have a house under contract for $75,000 in which the seller will pay $5000 towards my closing costs. 

2 days later someone comesup and says "I'd LOVE to buy this house for $85,000, but the buyer can only get qualified for $60,000.  Would you be interested in doing a seller financed deal for the remaining $25,000"?

Basically, as I understand it, this would be essentially selling the note.  Can someone give me a quick overview of options and if this is a horrible or decent or great option? (or what additional information would you need in order to help me make a semi-educated decision?)

If I put 20% down and go through closing (with the seller paying the closing), it would appear I'd basically have $15,000 out of pocket.  I'd then immediately sell it to the new buyer for $85,000.

They are financed for $60,000 and give me a check for $60,000.  I'm still out $15,000.

They then start making payments to the bank for their $60,000 loan and ME in 2nd position with my $25,000 lien on the property.  I wouldn't be paying any taxes or interest or insurance on the home as the deed is in the person's name I sold it to.

I'd haveno Property management or repair costs to worry about (or so I think.  hahaha).

After the new buyer pays off all their portion of the first mortgage, they'd be paying me I guess about $200 a month.  For my $15,000 investment, this would be about a 16% return on my money.  Not too shabby.  I'd like to do several of these.

So what am I missing?

I'm probably making all kinds of horrible newbie assumptions and invlid thoughts here. 

What if the buyer is foreclosed on?  I'm in second position so what happens then?

What's the worst that could happen?   I always like going into a deal knowing my worst case scenario. 

Any thoughts from those of you out there that are experience in this area of real estate would be greatly appreciated  My intent was just to rent this house out but I may have stumbled upon a new type of opportunity here that I haven't previously considered.

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  • Travis Hughes
    Denver, CO · Member since 2016 · 82 posts · 46 votes
    9y

    Well first of all, your buyer's purchase, down payment, and mortgage numbers don't add up.  If they are buying for $85,000 and get a 1st loan for $60,000, then you're still owed $25,000.  If you carry that $25,000 2nd position note, then your buyer has put $0 for down payment.

    If they put 20% for down payment on an $85,000 purchase, that would be $17,000.  Purchase $85,000 less $17,000 down payment equals $68,000 remaining due.  Now if they get a 1st position note for $60,000 then they would still owe you $8,000 which is what they would be asking you to carry back.  Make sense? 

    If your buyer has $17,000 plus closing costs to put down, but they can only get a $60,000 loan because $68,000 would be too much for them to borrow, then that sounds like a red flag to me.  

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  • Gary Headrick
    St. Marys, GA · Member since 2016 · 154 posts · 74 votes
    9y

    Travis makes some good points but I didn't read where the new buyer is putting 20% down (maybe I missed it) but if not, they have nothing in this deal so the bank and you are carrying the whole thing. Big Flag.

    As an investor, I don't get involved with seconds because I rarely keep enough cash on hand to buyout the first. I could get a loan to do it but not worth the hassle to me.

    Worst case is your new buyer has nothing in the deal, rents it out and pockets the rent money, makes no repairs and the property gets run down, goes through a protracted foreclosure and, unless you have the funds to take out the first, you are out the $25K.

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  • Travis Hughes
    Denver, CO · Member since 2016 · 82 posts · 46 votes
    9y

    @Gary Headrick yes I misread - the OP was talking about THEM putting 20% down and then the buyer purchasing with 0% down.  Definitely not a good idea. 

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  • Steve S.
    OP
    Dallas, TX · Member since 2014 · 650 posts · 53 votes
    9y
    Originally posted by @Gary Headrick:

    Travis makes some good points but I didn't read where the new buyer is putting 20% down (maybe I missed it) but if not, they have nothing in this deal so the bank and you are carrying the whole thing. Big Flag.

    As an investor, I don't get involved with seconds because I rarely keep enough cash on hand to buyout the first. I could get a loan to do it but not worth the hassle to me.

    Worst case is your new buyer has nothing in the deal, rents it out and pockets the rent money, makes no repairs and the property gets run down, goes through a protracted foreclosure and, unless you have the funds to take out the first, you are out the $25K.

     Let me try to be more clear.   I bought house for $75k. The buyer wants to buy it from me for $85k but has only been approved for $60k. 

    They would hand me a check for $60k and I'd put a 2nd lien on the property for the remaining $25k. 

    I'm trying to understand how to do this as it's basically a "note" deal where I'm selling them the paper and they are on the deed (not me). 

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  • Travis Hughes
    Denver, CO · Member since 2016 · 82 posts · 46 votes
    9y

    @Steve S. what we are saying is that you do NOT want to do that.  If your buyer can only secure a mortgage in the amount of $60,000 (do they even originate 1st position mortgages that small?  Many banks won't lend less than $50,000...), then why would you allow them to buy a house from you for $0 down?  They would have no "skin in the game" and no equity to boot.  There is no incentive for them to perform on your loan, especially if their credit is already not so great. 

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  • Percy N.
    Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 905 votes
    9y
    Steve S. , another way to look at it is if the buyer cannot make the payments and the 1st position lien holder forecloses, what happens to your loan? How do you plan to recover it?
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  • Matt LavinderPro Member
    Real Estate Investor · Bristol, TN · Member since 2010 · 59 posts · 31 votes
    9y

    There are several reasons this wouldn't work.  At that price point,  they are probably going to have to get an fha mortgage in order for them "to hand you 60k".  Fha requires the seller (you) to own the property 90 days before they can contact to purchase.  An appraiser will then need to appraise the house for 85k.  You'll need to justify the increased value to the appraiser with improvements because Appraisers are very skittish of situations like this and need to cover themselves.   The buyer will also have to include the payment to you on the 25k in their debt to income ratio with the lender and that additional debt payment will probably disqualify them.  Even if you get through all that, you've got a second position on a low quality note. 

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  • Steve S.
    OP
    Dallas, TX · Member since 2014 · 650 posts · 53 votes
    9y
    Originally posted by @Matt Lavinder:

    There are several reasons this wouldn't work.  At that price point,  they are probably going to have to get an fha mortgage in order for them "to hand you 60k".  Fha requires the seller (you) to own the property 90 days before they can contact to purchase.  An appraiser will then need to appraise the house for 85k.  You'll need to justify the increased value to the appraiser with improvements because Appraisers are very skittish of situations like this and need to cover themselves.   The buyer will also have to include the payment to you on the 25k in their debt to income ratio with the lender and that additional debt payment will probably disqualify them.  Even if you get through all that, you've got a second position on a low quality note. 

     I'm sorry guys.  They would make a $15,000 deposit.

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