Potential Seller Financing Investment to Buy

[Nick Walters]

My wife and I have an opportunity to purchase a single family investment property on Cape Cod, MA and wanted some advice on how to proceed using seller financing. We would explore taking out a conventional mortgage but the seller wants to get rid of it quickly, doesn't want to list it, and wants to deal directly with us (she's a friend of a friend and going through a divorce). We only have about 10% cash for a down payment (purchase price will be ~325K) and I just started a new job so I don't think we could get favorable terms with how long I've been at my currently job.
If we can finance it through the seller for a term of 3-5 years which would give us time to be able to refinance within that time period, I think this would be beneficial to us. Purchase price would be pretty close to market but 30% below the peak in 2005. We'd like to keep this for the long term and use it as a summer rental property (very hot market on Cape Cod) and for our use when not rented.
I'd just like some advice on how to structure this deal and present it to the owner. Thanks in advance for any help you can provide.
Nick

[Account Closed]

Nick, it will definitely be worth the money for you to bring a Realtor or attorney in on your side. There are a lot of potential difficulties in this deal, not the least of which is your seller is a friend of a friend, and she is in a very unstable emotional state. Once you are sure that the contract is solid, move ahead and enjoy your new investment at Cape Cod.

[Bill Gulley]

Sounds like this is not an investment property, but for you.

I suggest you go to a mortgage originator/lender and spend a few minutes to be pre-qualified and explain your circumstances. You need to know what you need to do to be qualified in 3 to 5 years, or in a year if any type of loan might be available to you.

Search here about the due on sale clause, much has been written, but understand the options.

Look up Sub-to as one solution, Contract for deed is another or if nothing is owed on the property simply do a note and deed of trust. 10% is fine for the down for one who can be quickly qualified.

You also need to have a Realtor or appraiser to value the property to ensure that you are not over paying, owners have their own ideas and while they may not think they are high, they can be and your future financing will depend on the valuation to establish your equity for loan purposes.

Whatever you end up doing, use a servicer during the seller financed period to establish your credit instead of having to get cancelled checks later on, if a seller deposits your checks late, regardless of reason, you get tagged with a late payment, so use a servicer.

Get with a local RE attorney to guide you through the note or financing agreements. A Realtor really isn't qualified to design such agreements.

Research here on BP about SF deals and loan servicing and ask before you leap. Good luck :)

[Nick Walters]

So I just spoke to my attorney and he mentioned that if the seller has a mortgage on the property, that this seller-financed deal probably won't work because the current lender on the property may call their note. Is this accurate? How about assuming the mortgage sub-to?
Thanks in advance for the info

[Wayne Brooks]

Nick Walters The due on sale is always a possibility, but quite rare.
The loan will not be Assumable, where the lender replaces the seller, with you.
Subject 2, is the same situation as seller financing-ownership changes, the loan isn't paid off, same due on sale risks. As Bill suggested, see what kind of refinancing you can get, and when, in the event the loan gets called. Technically, it's a Seller problem, but of course it's your problem too.

[Clay Huber]

Bill Gulley mentioned this already, but in my opinion this "is" the first place you need to start: figure out what the fair market value of the property is.

Don't waste your time going through all these steps to only find that you would be over paying for the home.

Make sure this venture is even worth pursuing before you devote your precious time in lining up all the logistics.

[Bill Gulley]

We could say the first thing to do is to ensure you don't run out of gas to go see the property, LOL

Yes, you want to strike the right price before you seek any financing arrangement on any property.

Nick, your attorney is correct, it's his/her job to inform you, not scare you so much. Ask your attorney which installment type contract would be best in your area. If the answer is none because of the due on sale clause, you don't have the right attorney, as they may not be aware of the real risk involved and assist you in a path that has an acceptable risk to do business.

If you are going to do some installment contract, the due on sale is not the only issue, there is the SAFE Act, Option restrictions, tax issues, insurance and maintenance matters that can affect the interests you have. The Sub-2 is the safest for a buyer as they receive title, but as Wayne pointed out, while any underlying mortgage can be called due is the seller's problem, it becomes your problem, you may be required to pay off the obligation to keep the property in reality. In the first three to six months you're pretty safe in any installment deal, after that a lender may begin to lower the hammer and you may have a few months thereafter to solve the problem, so you really need to be ready to refinance the deal or sell it. Always have an exit. :)