All Forum Posts by: Jeff Groudan

Is there a Deed of Trust or Mortgage Document filed?   These usually call out how a foreclosure would proceed...Judicial or non-Judicial.   Does the bank have a process to proceed with a foreclosure?

We have only had to foreclose once on an Seller Financed Note and the process was called out in the Deed of Trust (we are in Texas).

If the bank does not have a process, there are usually 3rd party real estate attorneys or firms in every city/county that will execute a foreclosure and eviction (if needed) on your behalf, for a fee of course.

Good luck...

My first questions to get answered are always:

-  Do they have an existing mortgage or do they own the home free and clear (if a mortgage is present, do they need to pay it off for the deal to work)

- Do they need the cash or do they want a prolonged income stream

Answers to those questions can help understand some of the key seller motivations.

A typical seller financing structure would have a down-payment that would range from $10-$20K up to 10%-20%.

Interest rates typically range 1-4pts over residential real estate mortgage interest rates

If the seller wants long term cash-flow, the term can be 10yr-30yr.   If the seller wants their cash back relatively quickly, then a 5-10yr balloon is more typical.

Again, as mentioned, ultimately, it comes down to what the seller is willing to accept.

Also as mentioned, if you do agree on basic terms, find a good real-estate lawyer or title company to help structure and document the deal

Hi James, 

   I agree with Sedgrid, close with a real estate attorney and/or a title company to make sure all the paperwork is done correctly, and filed, to protect you and the seller.

For the terms, there is always some give and take between downpayment, sales price and interest rate so it will depend on your degrees of flexibility as well as the sellers.  

Commercial financing is sometimes assumable but if the loan(s) are 30yr fixed, residential type mortgage they would be subject to due-on-sale.

You could execute this as a wrap mortgage where the properties are sold to you, the seller continues to pay his underlying mortgage and you create a promissory note between you and the seller to document the financing between the Seller and You.   There is risk to triggering the due on sale clause but typically, as long as the bank continues to get paid, a bank will not go out of their way to disrupt a performing note.

If you have never done a wrap seller finance transaction before, you will absolutely need a good real estate lawyer or title company who is familiar with these transactions.   You will also need a good insurance company to help structure the insurance correctly.    A good source for these types of contacts can be the local real estate networking groups in your city.

Good luck!

You should be good on Dodd Frank/SAFE.  Only 1 sale in a year would be exempt and if considered a commercial property sale you are also exempt (these regulations really focus on sales to individuals for their personal home.

You don't sound super motivated so I'd let the buyers do their own due diligence - as previously mentioned.

Sales Price, Interest Rate and Down Payment terms all work together so if they need flexibility on, say for example the downpayment, you can then up the interest rate or go to 20yr amortization.   I generally don't like to go less than $10K-$20K on a downpayment to be sure the buyer has skin in the game.

I ABSOLUTELY recommend you work with a Real Estate Lawyer and/or Title company on deeds, promissory notes, deed of trust etc... to make sure everything is drawn up correctly and filed correctly.

To me it depends on your strategy - if your goal is to live of the net rental income, I would not buy negative income rentals unless you have a strategy to reposition them to gain higher rents and positive cash-flow in an understood time frame.

Now, if you have a portfolio of rentals, you can consider buying some for cash-flow and some for appreciation.    We buy mostly for cash-flow but we consider appreciation rates in the neighborhoods.   We have one rental property which is in a 15% per year appreciation neighborhood so we accept basically break-even cashflow as we know in 10yrs we can sell it if we want to and make significant capital gains.

A few other comments for Ken...

Q:  when/how could I go about refinancing to a bank mortgage?   Would I have to again pay 25-30% down? 

     JG:  Harjeet is far more knowledgable than I around bank lending so I defer to her.   On the downpayment, you should certainly get some credit for your downpayment already paid and principle paydown.

Q:  Would the rental income help me get approved for that loan? 

   JG:   It should help from an overall debt-to-income analysis perspective although every lender is different.

Q:  Would a balloon payment go to the seller directly from the bank? 

JG:  Normally, yes, the lender doing the refi, via a title company, would normally route the $$ directly to the lien holders.

Q:  How soon after I settle on contract for deed with seller can I then refinance that property? Any insight on this would be greatly appreciated. 

    JG:   Defer to Harjeet...

my thoughts:

JH:  right off the bat I told him I'd want some leeway/consideration on the sales price since I'll be paying him @$600 a month in interest. He nodded and said he would take that into consideration on the sales price. Just making sure I'm not crazy thinking this way.

JG: There are two kinds of seller finance sellers (in my experience). Those that Seller Finance to get their price and those that Seller Finance to get long term income and maximize their ROI. It sounds like your seller is the latter so yes, it is reasonable to ask for a lower price in exchange for higher monthly income or long term income.

JH:  Interest rates: Is it wrong to ask for a lower than market interest rate or is the standard just the current industry mortgage rate?

   JG:  The Interest rate is in many ways a measure of the risk of a particular investment.   Seller Financing (from a Seller's perspective) is generally perceived as more risky than selling to someone with a bank loan so in my experience the interest rate needs to be higher than market.   If I am the seller, I am probably not going to want to discount both sales price and interest rates  below market.  That said, it really comes down to whatever you can negotiate. 

JH:  As far as actually facilitating the deal, is there somewhere I could find some steps or guidance? Do you essentially just do a FSBO transaction and the lending portion can be drafted by an attorney?

     JG:  I recommend using a title company or real estate attorney to execute seller financing transactions.  They can ensure title is insured and the deed, deed of trust, promissory notes, etc... are all drafted and filed correctly.   This protects both you and the seller.

 JH:  They are the bank so they hold the deed?

     JG:   You should be on title (on the Deed) after the sale.   There is a different document (Deed of Trust) that gives the seller the same rights as a bank in that the home becomes collateral for the seller financed note.

JH:   How do property taxes work when they are still the deeded owner? 

    JG:   You are the new owner so you are financially responsible for the property taxes.    You and the seller may choose to escrow the property taxes so you pay a portion of the taxes each month.  You, the seller or a 3rd party loan servicing company can make the actual payment of the taxes to the local tax authority.   I always recommend a loan servicing company to play the role as a neutral fiduciary to make sure all the payments are property processed.

Another really good houston title company that does a great job with seller financing is Infinity Title.

You'd have the first lien position so you can foreclose if the buyer stops paying.   Texas law is a relatively easy state for foreclosures - if necessary.

A $50K down payment is a very good down payment so that should give you some confidence in the buyer.   If you do have to foreclose, you get to keep the $50K down payment...

Contact Sharon Ferrell at Infinity Title in Houston

A seller financing promissory note is effectively identical to a promissory note you'd get from wells fargo or chase...

I'd focus on sharing the terms with them (interest rate, amortization period, monthly payments, balloon payment, etc..) and then just say you will close exactly the same way you'd close with a bank mortgage (title company, real estate lawyer, deed of trust, promissory note, etc..)

I don't know how Georgia closes specifically but I would always recommend you close with either a title company or real estate lawyer - whatever is typical in your state.

For all intents and purposes, closings with bank financing or seller financing are really the same.   The big differences are is the source of financing.   You will need a promissory note and deed of trust so you certainly need this paperwork drawn up correctly and filed.