Seller finance a property with existing Mortgage
Investor · Wichita, KS · Member since 2017 · 133 posts · 41 votes
Seller finance a property with existing Mortgage
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Investor · Orlando, FL · Member since 2013 · 837 posts · 316 votes
8yOriginally posted by @Dustin Burke:
Has anyone seller financed a property when you still had an existing mortgage?
Is this legal?
What are the pros & Cons?
What are the situations someone would consider this transaction? (ei: better cash flow)
Hello Dustin,
Yes! I have bought property subject to and I've also bought notes subject to underlying liens. They are also referred to as All Inclusive Trust Deeds or Wraparound mortgages. There are definitely "issues" to be considered surrounding the due on sale, being sure the first gets paid, escrows, etc. Here is one example:
I bought a 4 plex out in Spokane WA with seller financing which my daughter nicknamed "The Pink House" (it was an old Victorian house painted pink with green trim). The sales price was $139,000 with a down payment of $21,500 leaving an owner financed note of $117,500 at 8% amortized over 20 years. It had two underlying liens owed by the seller. Each month we sent our $983.00 principal and interest payment to the Servicing Company.
The servicing company had a written agreement that they were obligated to forward a $476.17 principal and interest payment to the first position underlying lender and another $125.41 to the second underlying lien holder. The difference between our payment of $983 and the two underlying lien payments of $476.17 and $125.41 was $381.42. This net amount was remitted to the seller each month.
If the underlying lien holder collects an amount equal to 1/12 the annual tax and/or insurance due, then this amount would also be collected from the purchaser each month and passed through with the payment to the underlying lien holder servicing the reserves.
With “The Pink House” we had to make a claim on the insurance policy. The
tenants were predominantly college students (we had the parents co-sign the
lease). It was winter break and many went home for the holiday. It was a
particularly cold winter with temperatures below zero. We discovered college
students could be quite thrifty, as they all turned down the heat in their
individually metered units while away. When they returned and turned on the heat,
we received the emergency tenant call sending out an SOS. When I opened the
front door to the main entrance containing the grand stairway, there was a two story
waterfall cascading down the stairs. There was considerable damage and a
claim against the insurance was necessary.
Now it gets interesting. The underlying lien holder was listed as one of the loss
payees. The claim was for an amount sufficient to require the insurance company
to make the check payable to both of us, the insured and the underlying
mortgagee. Knowing this lender or mortgagee made a loan to the prior owners
and had a due on sale clause, I took a deep breath and bravely took the check,
closing documents and the contract down to the local branch office. I explained
the need for their endorsement to complete the repairs that were necessary to
maintain the value of their collateral. They looked up the loan, called a manager
and fussed about the fact the property had been transferred. After much
discussion, they endorsed the check and we never heard anything further. Our
sellers were paying them a rather high interest rate at 11% (we were only paying them 8% so do that math) and it seemed the lender was happy as long as they received their payments timely.
11 Replies
- Wichita, KS · Member since 2018 · 16 posts · 13 votes8y
@Dustin Burke I haven't done it myself, but I did find a helpful article.
http://homeguides.sfgate.com/can-seller-offer-owne...
Also, they talk about similar situations on the BiggerPockets podcast show #70. To summarize the episode, it is not illegal, however, the transfer of the property gives the bank the option to call the note. Usually not an issue when the seller continues to make payments on time, but may be triggered if they stop paying or pay late.
https://www.biggerpockets.com/renewsblog/2014/05/1...
I think they detail some specific situations where they use this strategy. Hope this helps.
Stephen
- Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes8y
Hi @Dustin Burke points out, most lenders include a clause in their loan documents that allows for the loan to be called due if the property is sold. This is known as the dreaded "due-on-sale" clause, or DoSC. When the seller triggers the DoSC they are operating withing the context of a civil agreement: No criminal laws are being broken. As the saying goes, there is no due-on-sale jail that you are sent to!
Buying Sub2 is a powerful tool, the main benefit of which is that you can take ownership of a property without having to qualify for a mortgage to purchase it. Assuming the existing financing is appealing (low payment, fixed interest rate), you can often use Sub2 to acquire houses at a very low cost.
That said, Sub2 requires considerable training and solid paperwork. It's no secret that I'm a big fan of Dyches Boddiford's coursework in this area. If you are interested, Google him and grab his Creative Financing Techniques course.
- Investor · Wichita, KS · Member since 2017 · 133 posts · 41 votes8y
@Stephen Burtin Thanks for the podcast recommendation. I listened to it twice.
@Mitch Messer Thanks for recommending Dyches Boddiford. I will look into this course.
The "Subject To" model is solid. To simply take over an existing loan and then inheriting the equity is brilliant. And then you still have cash flow when you rent it.
The strategy I am considering is more along the lines of purchasing and funding the rehab with cash then refinancing, pulling out just the cash I have invested; then carrying the note (at a higher interest rate and slightly larger monthly payment) for the future buyer.
This makes the deal cash flow even better as I don't have to account for capital expenditures or vacancy. What I don't have figured out is who's name the deed is in at the time I start carrying the note for the new buyers? If it's in their name then I also will not have to pay taxes and insurance... OR for tax reasons would I want it in my name until paid off? Thoughts???
- Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes8y
@Dustin Burke Ah, I see now! Fortunately, it's a similar dynamic, just in a different direction: You want to sell subject to your existing financing. Technically, what you probably want to offer is wraparound financing. You would wrap your refinancing loan with a new note that is at your "higher interest rate and slightly larger monthly payment." Your buyer makes payment to you while you make payment to your underlying lender.
We do those quite a bit here in Georgia. I'd be happy to put you in touch with our closing attorney for the note and mortgage specifics.
This transaction is still a sale, though, so the buyer's name will be on the deed and the buyer will need to obtain pay taxes and insurance. The buyer will get any tax deduction for interest paid; You are now the bank, not the owner.
Also, just be mindful that if you are planning to sell to an owner-occupant, you'll have to contend with the dreaded Dodd-Frank Act and all the attendant paperwork and overhead. Not so if you sell to another investor.
- Investor · Wichita, KS · Member since 2017 · 133 posts · 41 votes8y
@Mitch Messer yes please do get me connected with your closing attorney. I would love to get some first hand experience help with the in & outs. Thanks for the info you have provided...
- Investor · Orlando, FL · Member since 2013 · 837 posts · 316 votes8y
Originally posted by @Dustin Burke:
Has anyone seller financed a property when you still had an existing mortgage?
Is this legal?
What are the pros & Cons?
What are the situations someone would consider this transaction? (ei: better cash flow)
Hello Dustin,
Yes! I have bought property subject to and I've also bought notes subject to underlying liens. They are also referred to as All Inclusive Trust Deeds or Wraparound mortgages. There are definitely "issues" to be considered surrounding the due on sale, being sure the first gets paid, escrows, etc. Here is one example:
I bought a 4 plex out in Spokane WA with seller financing which my daughter nicknamed "The Pink House" (it was an old Victorian house painted pink with green trim). The sales price was $139,000 with a down payment of $21,500 leaving an owner financed note of $117,500 at 8% amortized over 20 years. It had two underlying liens owed by the seller. Each month we sent our $983.00 principal and interest payment to the Servicing Company.
The servicing company had a written agreement that they were obligated to forward a $476.17 principal and interest payment to the first position underlying lender and another $125.41 to the second underlying lien holder. The difference between our payment of $983 and the two underlying lien payments of $476.17 and $125.41 was $381.42. This net amount was remitted to the seller each month.
If the underlying lien holder collects an amount equal to 1/12 the annual tax and/or insurance due, then this amount would also be collected from the purchaser each month and passed through with the payment to the underlying lien holder servicing the reserves.
With “The Pink House” we had to make a claim on the insurance policy. The
tenants were predominantly college students (we had the parents co-sign the
lease). It was winter break and many went home for the holiday. It was a
particularly cold winter with temperatures below zero. We discovered college
students could be quite thrifty, as they all turned down the heat in their
individually metered units while away. When they returned and turned on the heat,
we received the emergency tenant call sending out an SOS. When I opened the
front door to the main entrance containing the grand stairway, there was a two story
waterfall cascading down the stairs. There was considerable damage and a
claim against the insurance was necessary.
Now it gets interesting. The underlying lien holder was listed as one of the loss
payees. The claim was for an amount sufficient to require the insurance company
to make the check payable to both of us, the insured and the underlying
mortgagee. Knowing this lender or mortgagee made a loan to the prior owners
and had a due on sale clause, I took a deep breath and bravely took the check,
closing documents and the contract down to the local branch office. I explained
the need for their endorsement to complete the repairs that were necessary to
maintain the value of their collateral. They looked up the loan, called a manager
and fussed about the fact the property had been transferred. After much
discussion, they endorsed the check and we never heard anything further. Our
sellers were paying them a rather high interest rate at 11% (we were only paying them 8% so do that math) and it seemed the lender was happy as long as they received their payments timely.
- Investor · Wichita, KS · Member since 2017 · 133 posts · 41 votes8y
@Tracy Z. Rewey interesting story and glad it worked out for you. This is definitely something to consider when moving forward with these types of transactions. Thanks for the heads up!
Blue skies always, Dustin
- Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes8y
Hey @Dustin Burke I just sent you that closing attorney referral in my connect request.
- Investor · Wichita, KS · Member since 2017 · 133 posts · 41 votes7y
@Tracy Z. Rewey hello Tracy. I'm going to PM you in regards to this post so I thought Id tag you for your refer...
- Investor · Orlando, FL · Member since 2013 · 837 posts · 316 votes7y
Originally posted by @Dustin Burke:
@Tracy Z. Rewey hello Tracy. I'm going to PM you in regards to this post so I thought Id tag you for your refer...
I sent some helpful document sample links via your PM. Hope that helps! Tracy
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
as stated above if your seller.. and you have an existing mortgage you can
1. sell sub too and collect your equity.
2. do a wrap and in essence wrap the first or simply do a second.
buyer takes title sub too you get the delta.
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