Can this be done?

Question

Hello fellow BP investors,

I need some clarification, and would appreciate any help. My question is, can a seller owner finance a property he still owes? The seller is moving to a bigger property after living in the property in question only for a year.

I'm wondering if maybe I can assign the owner finance contract, or sandwhich the property owner financing it to someone else?

Please help!

Hesron Gomez · Answer

Bill Gulley

"You need to obtain an option from the seller with the agreement of the property being sold subject-to with a wrap financing agreement. Then assign your option with lending terms tentatively agreed. Get the seller to accept the buyer, perhaps with your guarantee, after the real buyer is accepted then collect you fee and step out of the way allowing the seller to close with that buyer. Cleanest way, not so easy but it depends on seller's motivation too."

This would be my first deal, and I really don't want to be attached to the deal after closing. So I think the above option sounds best for me right now.

Thank you so much for taking your time to explain this to a newbie like myself, just need a little more help. Would you know if there's an example of an sub2 contract with an option in BP? Is an option just an addendum to the purchase contract?  So if I'm understanding all this right, the wrap financing agreement is a different document done by an attorney? Once all this is done, then I assign the sub2 contract to collect my fee?

I'm sorry Mr. Gulley, I'm just really green but really eager to get moving on my first deal.

Bill Gulley · Answer

Who pays what is by local custom, you should ask the title company what is customary, but you can negotiate who pays what. I have the seller pay for title search as they prove having good title and I pay for title insurance as I am the insured under the policy and settlement is split 50/50.

An option is a separate contract giving you the right to purchase. In that you can specify that you can purchase with a sub-2, that option needs to state the option may be assigned but that the right to purchase with a sub-2 transaction shall be with the approval of the seller. You need to see an attorney, there can different ways to construct this.

1. An option may not contain any contingencies or performance by the buyer, the seller may offer different financing options, being in Texas you don't want this to constitute an installment sale.

2. You can do separate contracts, an option, then a standing sub-2 to be executed as the purchase if the option is taken. The sub-2 can be assigned however, since it is a financing arrangement it must be done with the seller's approval to provide financing to that buyer.

#2 is what complicates your deal, wanting to assign with seller financing. Any seller financed transaction requires the seller to agree to make the obligation directly with that borrower, you can not commit a seller to finance anything to just anyone off the street as it is the type of a legal contract that must be made directly between a buyer being financed and seller. If you get rid of this aspect you'd just have a simple option, assign it for you fee and step out of the way and allow your buyer to get the financing (which would be best).

A sub-to passes title, search the topics here, they usually aren't assigned, but could be with seller approval. Doing so, in reality, will take some skills in explaining the arrangement to all parties, I can do it, doubt you should try it, especially not without an attorney. You could agree to co-sign the obligation with the buyer to ease the concerns of the seller, better think hard on that and if you do, you'll need another agreement to assign the sub-to back to you as a guarantor can't foreclose, it would be a sale from the buyer back to you, then you could have an eviction.

So, what you propose by having your buyer finance with the seller really complicates your deal and frankly I don't think you should go there being new. Another issue is that this really gets closer to facilitating a sale requiring a license than does simply using an option, assigning it and getting out of the way. Not only are you arranging the transaction but you're also arranging financing! I think you really just need to back up and back off. But if you try any of this you need an attorney, there are no guru contracts that will do this I'm sure. :)

Hesron Gomez · Answer

Also, who pays for title and attorney? Seller, buyer or me? Lol. Thanks!

Account Closed · Answer

Bill G

Nice explanation!

A chat at a credit union  I had awhile back similar to your post.

Bill Gulley · Answer

No! A financing contract can not be assigned by a borrower without consent of the lender. You would also be creating a financing arrangement to your buyer and you are not exempt under new lending laws as to an owner occupant selling their private residence.

You need to obtain an option from the seller with the agreement of the property being sold subject-to with a wrap financing agreement. Then assign your option with lending terms tentatively agreed. Get the seller to accept the buyer, perhaps with your guarantee, after the real buyer is accepted then collect you fee and step out of the way allowing the seller to close with that buyer. Cleanest way, not so easy but it depends on seller's motivation too.

Another way would be for you to buy sub-to and you could sell sub-to again. Doing this you'll have two closings. Your deed must address the underlying loan, 1st mtg as well as the prior sub-to and your financing which you will be responsible for. Your wrap would not contain a due on sale or alienation clause allowing your seller to call the debt due, but know the due on sale is still an issue with the 1st mtg taken. You'll be on the hook until your buyer buys and you'll need to step in if the 1st mtg is called due. While this can be done it's not the most desirable, unless you want to remain in the loop until your buyer closes.

A lease-option could be an alternative. Speculating not knowing your situation.

But, no, you can't have someone assume a loan without the lender's consent and if you pass the note on as an investor you may have compliance issues. :)

Hesron Gomez · Answer

Then assign the owner finance purchase?

Gautam Venkatesan · Answer

Yes it is possible search BP forums for wrap mortgages. The seller would create a subordinate lien to his mortgage and act as the bank to you.