Seller financing question, Need Help

Contractor · Pittsburgh, PA · Member since 2013 · 143 posts · 36 votes

I am asking a lot of questions lately! I appreciate all advice I get. I am having one hell of a time getting financed for a rental property I am trying to buy.

The seller is just your average home owner. He said he is up for seller finance, but is not sure how to set it up. Unfortunately, neither do I. Does the deed go to me right away, or after I Pay it off? Do we have a closing? If anyone has any advice of the topic I'D GREATLY appreciate it. Thank you!

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

12y

You have multiple choices.

But a key question is "is there a mortgage on the property". If so, will it get paid off? I'm guessing that there is and that it won't be paid off. If that's the case, keep in mind that you are violation the due on sale clause with any of these. That gives the lender the right, though not the obligation, to call the loan.

There are arranged from most favorable to the buyer/least favorable to the seller to the reverse.

1) Subject to: You buy the house subject to the existing mortgage. You take over making the payments. Seller is still on the old mortgage but has no control at all over the property. Buyer gets deed from seller at closing.

2) Wrap mortgage: A new mortgage is created between the buyer and the seller. Buyer makes payments to the seller on the new mortgage, seller makes payments to the existing lender. Because the seller has a security interest, they can foreclose if the buyer doesn't pay. Buyer gets deed from seller at closing.

3) Land contract (aka contract for deed): Like a car loan. Seller retains title. Buyer makes payments on the contract. When the contract is completed, buyer gets deed. Process for dealing with a buyer default varies from state to state. Generally more like a foreclosure than an eviction.

4) Lease with option to buy: Two separate contracts. One is a lease which gives buyer possession of the property. Second is an option contract that gives the buyer the right to buy the house at some point in the future. There may be credits for part of the rent to the purchase price. Buyer gets deed when they exercise the contract. If buyer doesn't pay rent, the option contract is typically invalidated and the seller evicts the buyer. These can be very predatory and aren't allowed in some states (e.g., Texas.)

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Winston Risser
Rental Property Investor · Redmond, OR · Member since 2012 · 72 posts · 13 votes
12y
I have only had one deal this way. In Oregon we had a Title Company do contract collections . So basically they are taking care of keeping track of all the funds. there is a closing. How long will the owner carry the contract ? Also does he still have a mortgage on the property or own it free and clear. I would contact a Real Estate Attorney to help write up the proper contratct for your state.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
You have multiple choices.

But a key question is "is there a mortgage on the property". If so, will it get paid off? I'm guessing that there is and that it won't be paid off. If that's the case, keep in mind that you are violation the due on sale clause with any of these. That gives the lender the right, though not the obligation, to call the loan.

There are arranged from most favorable to the buyer/least favorable to the seller to the reverse.

1) Subject to: You buy the house subject to the existing mortgage. You take over making the payments. Seller is still on the old mortgage but has no control at all over the property. Buyer gets deed from seller at closing.

2) Wrap mortgage: A new mortgage is created between the buyer and the seller. Buyer makes payments to the seller on the new mortgage, seller makes payments to the existing lender. Because the seller has a security interest, they can foreclose if the buyer doesn't pay. Buyer gets deed from seller at closing.

3) Land contract (aka contract for deed): Like a car loan. Seller retains title. Buyer makes payments on the contract. When the contract is completed, buyer gets deed. Process for dealing with a buyer default varies from state to state. Generally more like a foreclosure than an eviction.

4) Lease with option to buy: Two separate contracts. One is a lease which gives buyer possession of the property. Second is an option contract that gives the buyer the right to buy the house at some point in the future. There may be credits for part of the rent to the purchase price. Buyer gets deed when they exercise the contract. If buyer doesn't pay rent, the option contract is typically invalidated and the seller evicts the buyer. These can be very predatory and aren't allowed in some states (e.g., Texas.)
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Winston Risser
Rental Property Investor · Redmond, OR · Member since 2012 · 72 posts · 13 votes
12y
WOW @Jon Holdman I have never seen those different contracts explained so well. Thank You
0 Reply
Justin Escajeda
OP
Contractor · Pittsburgh, PA · Member since 2013 · 143 posts · 36 votes
12y
The property is owned free and clear of any financing. I was actually originally going to wholesale this and I do in fact have an option agreement with the seller. However, the more I analyze this, the more I am seeing how good of a deal it is for a buy and hold
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Jason Schaefer
Real Estate Investor · Chino Hills, CA · Member since 2012 · 13 posts · 4 votes
12y
Thanks @Jon Holdman for the excellent explanation. I have to admit I didn't completely understand some of the contracts until I read your post. I will copy and paste your explanation into my real estate notes for future reference.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Come to an agreement on the terms for a seller financed purchase, with the seller taking a mortgage. You'll need an attorney to help you with the contract, and a MLO to originate the loan and set it up properly, and a closing agent/title co., if it's not the same attorney. Get title insurance.
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Jenna Stonecipher
Real Estate Investor · Memphis, TN · Member since 2013 · 100 posts · 34 votes
12y
@Justin Escajeda I just closed on a home Tuesday with seller financing. I used the Bigger Pockets fileplace and downloaded the one-page purchase contract. I then found language for a seller financing addendum, which I attached to the purchase contract. I could share this with you if you like.

I used online amortization calculators to look at the number scenarios (terms, interest rates, balloons, etc.) I came up with a few different offers before I met with the seller--and we went from there. They key is to find out what the seller wants. My seller was stuck on a number; so, I used a long term and low financing to make it work for me. Other sellers may want to get out of the property faster. Structure 3 very different offers and then show them all. Ask which ones they like and what they like about them. Go from there.

After all of the documents were signed, I sent them to the RE/closing attorney who took it from there. Yes, we had a closing. Most people opt to use a servicing company for seller financed payments. The company would be responsible for confirming that payment was made and sending out notices if payments are late. They also charge a small fee for every payment though. If you use a servicing company I would work those fees into your financing addendum.
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Jenna Stonecipher
Real Estate Investor · Memphis, TN · Member since 2013 · 100 posts · 34 votes
12y
@Wayne Brooks is right. Get a title search and title insurance. It's worth it.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
If the property is free and clear the situation is much simpler. Just do a seller originated mortgage. That's essentially my #2 except there's no underlying mortgage. This is how I bought my first residence some 25+ years ago.

Absolutely use an attorney and a title company. You many need a licensed mortgage originator, too, especially if you're going to live in it.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Don't mess with installment contracts on this, as mentioned, use a note and deed of trust and buy it. In the deed of trust (mortgage) and note, state that the credit extended is for a business purpose and you won't need a mortgage originator but you do need an attorney. Don't try to get screwy with creative note terms, agree to an interest on principal and the term of the loan. I suggest you have 25% of equity (you can estimate a conservative rate of appreciation in that) before any balloon payment required, this will be necessary for you to refinance it in the future. Use a loan servicer as mentioned, the costs can be paid by you or the seller or divided as you agree, but use a servicer! Good luck :)
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Raymond B.
FL · Member since 2009 · 2k+ posts · 357 votes
12y
@Justin Escajeda

@Justin Escajeda

@Justin Escajeda

I am not Affiliated with, and do NOT receive any compensation for this recommendation.

Raymond
@Justin Escajeda
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Jerry Kisasonak
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
12y
@Jenna Stonecipher

Would you find sending me to info you referred to about the addendum and the 3 different offers?
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Pat L.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
12y
As an aside explain to the seller the 'assignment of rents' clause you may want to offer.

Back in the old days of my seller fiancee acquisitions it helped secure some of my deals. Never had to acquiesce thank God.

But as a HML I have cashed in on several myself & it has worked well to initiate a 'amicable' DIL vs foreclosure.
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Robert Williams
Residential Real Estate Broker · Washington, Washington D.C. · Member since 2013 · 150 posts · 77 votes
12y
Depending on how real estate closings work in your area, contact a local title company or real estate attorney. Basically, the seller will be serving as a bank in giving you a home loan. Your title company or real estate attorney will put together all the paperwork and they will become part of your closing package. You will hold the deed to the property, but the seller (as the lender) will have a lien that's secured by your mortgage (as documented in a note). Like any other lender, if you fail to make your loan payment, the seller can foreclose and take the property back.
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Jenna Stonecipher
Real Estate Investor · Memphis, TN · Member since 2013 · 100 posts · 34 votes
12y
@Jerry Kisasonak I just uploaded it to the fileplace under contracts. I recommend looking at other, more exhaustive, owner financing addendum online as well. Mine is just a basic document to get a verbal agreement in writing. I let the RE attorney do the rest.

As for the 3 offers, I don't have anything on that. I just look at 3 different ways to structure the deal using various tools: cash, financing, term, interest rates, balloon payments, etc. All 3 options should be structured in a way that makes financial sense to you.

3 example offers

1. 70k cash for the property

2. 200k owner financed with 0 down for 30 years at 1% interest

3. 5k down, 95k owner financed at 7% interest for 7 years with a balloon payment of unpaid principle.

To any number crunchers out there, these examples are completely fictitious and aren't rooted on anything specific. I just wanted to give a broad example of what I meant. Now, if you don't have 70k cash, obviously-- you wouldn't present #1 as an offer. You would create something else. Hope this helps.
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Jerry Kisasonak
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
12y
All kinds of things to consider here... First right of refusal, substitution of collateral, subordination clause, non-recourse provision, pre-payment penalty, etc.
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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
12y
Originally posted by @Jon Holdman:
...
4) Lease with option to buy: Two separate contracts. One is a lease which gives buyer possession of the property. Second is an option contract that gives the buyer the right to buy the house at some point in the future. There may be credits for part of the rent to the purchase price. Buyer gets deed when they exercise the contract. If buyer doesn't pay rent, the option contract is typically invalidated and the seller evicts the buyer. These can be very predatory and aren't allowed in some states (e.g., Texas.)

1) Texas LOs can be done as @John Jackson does them every day. The penalties from Austin legislators are stiff if they do not comply. Btw, a purchase and sale agreement (not a lease option) that provides for delivery of a deed in less than six months is not classified as an executor contract under existing Texas law or the new law.

2) Rent credits should be not used after Jan 10 2014 due to Dodd Frank.

3) Buyer gets the deed when title conveys and existing financing is paid off (loan is approved.

4) Some states like NC make it difficult to evict, and they need to have some kind of foreclosure. Investors need to be careful.

5) There are other "non-executory" tools like ROFRs, (Rights of first refusal), that can essentially tie up the property for the buyer.
1 Reply
Jerry Kisasonak
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
12y
@Jenna Stonecipher

Thanks! Got the doc. I was curious as to why you offered 1% interest on offer #2 versus just doing pricipal only payments. ?
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Jenna Stonecipher
Real Estate Investor · Memphis, TN · Member since 2013 · 100 posts · 34 votes
12y
@Jerry Kisasonak I was just throwing examples out there. It wasn't thought out. The great thing about RE investing is that there are so many options and means to an end. Love love love that.
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Jerry Kisasonak
Residential Real Estate Agent · Mc Keesport, PA · Member since 2012 · 449 posts · 154 votes
12y
@Jenna Stonecipher

I love the creativity that we can put into deals too!!!
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Stephanie MedellinBusiness Member
Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
12y
You do not need an MLO to originate a seller financed loan unless they are financing multiple properties during the year. Have an attorney prepare your purchase offer / contract and the deed of trust or mortgage, and make sure you're satisfied with the terms. Preparing these documents is not something a mortgage broker or loan officer does.

Yes, you get the deed at closing and the seller will get a lien on the property. I'm not sure of the proper names in PA, but when the loan is paid off (refinanced or otherwise), a deed of reconveyance should be filed with the county as evidence that your loan has been paid off.
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Justin Escajeda
OP
Contractor · Pittsburgh, PA · Member since 2013 · 143 posts · 36 votes
12y
Ok thanks everyone, the information was super helpful.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
One of my new year's resolutions is to try harder to understand that there will be investors (young, old, new, seasoned and all in between) that will do bad things, they will do bad things for a dime or perhaps for no reason at all really.

I'm also trying much harder not to use a hammer to swat flies when a bit of fly paper will do.

For those who insist on creating notes at 1% or zero interest, just understand that if you don't disclose to some unknowing seller that they will get tagged with imputed tax rates forced upon their note then you just created a potential liability for yourself.

If you have a mortgage broker who may be a party to your note, they may provide or write the note, I've written hundreds of them as a broker/servicer. But, you need to see an attorney on your deal.

When your loan is paid off, by payment, refinance or sale (for any reason) there is a release of the lien. This is done by a "deed of release" that terminates the existing lien. :)
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Justin Escajeda
OP
Contractor · Pittsburgh, PA · Member since 2013 · 143 posts · 36 votes
12y
@Bill Gulley I truly appreciate the advice. I have ready about 30 discussions about this topic and was still a bit confused. I have only used traditional lending on 3 properties, and paid cash with the rest. I created this topic merely for some feed back due to the fact I know very little about loans. I have chosen to use other means of financing for this deal, mainly because - for me - there are too many unknowns and I do not invest in what I do not understand. Perhaps one day I will (maybe). On another note I am a young investor, and have read plenty of your posts "laying down the hammer", so when I saw your name and icon responding to this topic, I was like "here we go, Im going to get laid into" haha. I do appreciate the advice though, I hope you keep up with your resolutions.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Bill, we're starting a pool to see how long that resolution lasts, it's not as much fun with it. I'm in at 01/06/14 6:19 pm eastern time.
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