BiggerPockets

I'm about to make an offer on a multiple-property deal with seller financing and I have some questions. I assume if the deal gets accepted, I'll need to get a real estate lawyer but in the mean time, I'm thinking of things I want to include in the terms of my offer. Besides the usual down payment, amortization period, and interest rate, here are some things I've thought of:

- No prepayment penalty
- Seller will report interest as taxable income and issue the appropriate tax forms
- I may try to sneak in no due on sale clause
- Fixed interest rate

What am I missing?

How will I track what's been paid to principle and interest? Is there a software I can buy, or do I simply use Excel's payment functions, and then get the seller to sign off on a statement each year (I know they should be the ones sending me a statement but they're very unsophisticated).

We would probably close on the 44 separate properties in 4 batches of 11 properties. What if I want to sell just 1 out of 11 in a batch?

Thanks!

You may want to see if you can go interest only for the first few years with the loan recasting to fully amortized for the remainder of the term after that. That can help you control costs as you are initially buying these and stabilizing them. In addition, you'll want a blanket loan that allows you to sell without having to re characterize the loan. That is, your P/I payment would stay the same even if you pay off one or two of the properties. It can get expensive to have a lawyer redraft the loan every time you spin something off and then re record it against the remaining titles.

Since you will be buying these in separate transactions you'll most likely have four different loans. You can get an amortization schedule online to see how much P/I you've paid over the course of the year but it's still the seller's legal responsibility to provide you with a 1098 if you are paying them a mortgage.

Here are some other items:

1. Recourse or non-recourse?
2. Release clauses (very important IMO)
3. Terms for release clauses and who gets paid when. This is customarily done to ensure the lender's security interest stays at least as good as it was at the outset. So if you have 95% LTV you will need to pay the loan down to maintain that LTV when you sell one of the batch

I would also advise you to get a servicing company involved. Keeping track of everything on your own is going to be a hassle....especially if you sell some properties with the release clauses. TValue is something worth looking at if you are not going to use a servicing company.

I wouldn't muddy the waters with notes that get recast unless you need to. It sounds like the seller may get confused by this. A confused mind does nothing ;-)

I have 23 units already so it would be a huge increase but better than going from 0.

These properties are all paid off so at least that won't be an issue.

The main reason I want no due on sale clause is because I like this 5% interest rate so much, I'd like to have the option to invest funds received from a sale in other properties, but also the option to pay down the debt as well. Plus, it would complicate things to pay part of the debt off. I'm not sure how the sellers feel about this.

Thanks for the referral to Angelo Russo. I'll contact him and go from there.

I'd like to find a good informative book to educate myself on the subject, even though a lawyer will draw up the paperwork. Does anyone have any recommendations?

Keep in mind what state you are in and that Angelo may not be licensened there, however he could give some ideas on your note. But, I would not be paying anyone other than YOUR attorney. Real estate is local! Concepts can be adapted, specific terms should meet what is customary in your area. Customizing a note or deed of trust needs some local input.

There is no benefit to a blanket loan, especially for the private lender if they knew more about their options. You still need to file the lien on each property, so you don't really save anything on filing fees or closing costs.

Selling with a BL will mean a partial release being filed, does your lender know how to do that or will they be going to an attrorney evertime you want to do something? The PR is no big deal, but if an error is made, I have seen the wrong property released, the amount required being more than what it might sell for and insurance claim problems. Each of these aspects needs to be individually addressed with a BL. You don't have these issues with one note on one property.

You will have a high LTV as I understand the deal. As Jon pointed out, in a BL one property may represent 30% of the balance due. If you had staggered the loans as I had suggested, you could refi on property, say for improments being necessary due to damage from a fire (it happens). That 30% of the outstand balance may not be met to release a property when the LTV of the new loan is assessed on that one property. There are issues with releases.

The notes and security agreements are identical with the exception of the amount, payment required and the legal description of the collateral.

You will also be placing several properties at risk under events of default that can arise, putting more eggs in one basket. No one plans to default, but it happens. How would this be addressed if you were every to sell one property with a sub-2 or installment transaction?

One other point, a BL will be likely construed as a commercial loan. That's fine for you, but what about any future buyer if you did sell with an installment? Now you are blending two different types of loans and rules to be addressed. Having an individual residential loan could be assumed and easily managed.

And, again, seller financed transactions are considered to be financing the transaction, they are not cash advance loans and therefore are more often, except under certain condiotions, without recourse. Making it as a commercial loan transaction under a BL could change this aspect under your state laws, so any deficiencies are simply added to other amounts owing and deficiencies may be sought.

Don't let the number of properties cloud the issue or complicate the overall scheme of the objective and options available down the road. Keep it simple..