Would Seller Financing Work for ME?

Question

Details.

1 rental property great renters, they are interested in buying it one day.

2. I owe 90k on original 100k loan @ 5% =$535 or $735 (payment + tax + insurance )

3. Currently rents for $870

4. Current market value on zillow is $130k

I just had 3 rd baby and thought seller financing might work to lessen the landlord load while still providing passive income.

My thoughts are sell for 135k with $10k down at 6.6%=$800 or $1000 ( payment + tax + insurance )

I have heard about banks calling the loan at sale ? would that effect this situation?

Does my existing loan need to be much less or is $90k ok?

Can the loan be for 30 years or is 5 to 20 more common?

Am i missing other cost or fees?

I like the idea of increasing cash flow from $135 a month to $265 almost double.

At this point trading the possibility of long term equity growth for increased cash flow and decreased phone calls at 1:00am seems worth it at this stage of life.

Thanks in advanced and sorry if this is a silly idea.

Scott

P.S. even if i don't go this route on this deal i would like to learn more about it. Any good books or resources would be a big help.

Steve L. · Answer

Does your Seller qualify for their own financing?  With an FHA loan, and 10k down they can get financing (assuming they have credit and verifiable income).

40-45,000 will get you more then $265/month spread.

To answer your full questions:

- It is possible that the note will be called due but unlikely.  I have 3-4 subject 2 deals.  Most people get busted when the bank requests an evidence of insurance.  Be careful how you handle those.

- Your loan amount doesn't matter too much. It is important your loan is the same or under the new one.  What you are proposing is called a wrap.

- The length of the loan is up to you.  If your Buyer is smart they will want to refinance as soon as they qualify.  They can get 4-4.5% interest.  Why pay you 6.6%.

- If you get regular calls at 1 AM from your tenants you are doing things wrong or have the wrong tenant.  If they are regularly calling you and cannot handle situations you don't want to be a noteholder for them either.

Account Closed · Answer

I have never done this but have thought that its a good exit strategy for rentals. However you do have a couple of issues. First, I dont think you can transfer title and still keep the mortgage. So you have to do a sub2 kind of deal to have the buyer take over your loan. Then I guess you could do a second mortgage for the difference. But what you want to do, and I dont see how, is take the spread on the interest you pay the bank and interest you charge the buyer.

Secondly, do you really want to carry a 30 year note? What if the buyer never refinances? What if you want the cash at some point? You could make the second a 5 or 10 year balloon note and since it would only be for about $25K, that might work. Of course cash flow at 6.6% on 25K is not very much. But thats the only equity I see in this situation.

Thats my understanding but if anyone knows a better way I would be very interested in knowing how to capture interest rate spread after a sale!

Scott McGill · Answer

Wonderful info guys. You all at BP are so very helpful I love it.

Thanks @Steve L. for bringing up they could just refi and my passive income is gone.

Thanks @Aaron Junck  for lease option idea. Ill have to look into that for sure. Aldo bringing up regs. I could see myself getting screwed over some how if I'm not super careful.

Thanks Anish Tolia  fir pounting out the lack of liquidity in this kind of deal.

Thanks Bill Gulley  for being a huge resorce on BP.

Aaron Junck · Answer

A few things I haven't seen addressed here. Dodd Frank ring a bell??

It sounds like you are going to act as a lender and back in January a whole mess came about on owner financing. I would look into this in great detail so you don't get in trouble. When doing owner occupied I don't believe you can do a balloon anymore. Bill Gulley  maybe can chime in.

If they can't get approved through your typical bank why not do a short term lease option. (2 separate documents, 1 lease and 1 option) 1. you can still get money upfront. 2. re-write a new lease that has them taking care of things that break up to $100 and anything over that you both split the cost... 3. you still keep control of the property. 4. you don't lose your depreciation each year.

Otherwise, I agree with the above at 40,000 in cash can be invested and get more that a few hundred a month in returns if done right.

If you want to get around a due on sale clause and you do follow through with your sub-to financing , you can always put your property into a revocable trust and then , long story short, sell them the interest of the trust. The bank won't be able to see anything happen. Google Clint Coons ,he has some in depth details on how this can be done.

Brian Gibbons · Answer

There is an attorney in Oregon that does seller financing and has RMLOs available in those states.

See

http://www.biggerpockets.com/blogs/3/blog_posts/37446-attorney-for-seller-financing---dodd-frank-info-in-ca-or-wa-and-az

Bill Gulley · Answer

You can search "Dodd-Frank" here on BP, you'll find tons to read. Bottom line, see your attorney and not a guru attorney selling ways to circumvent the intent of the law as there aren't any ways, if you're covered under the law then compliance is the best course of action or don't do it. :)

Would Seller Financing Work for ME?

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