If seller has a mortgage can we still negotiate seller financing?

13 Replies

Greetings Everyone,

Thanks for clicking on my post!  

I am in the initial process of creating a "seller financing offer" to a homeowner who is interested in selling a single-family residential home.  The backstory is that this house sat on the market for a long time and the frustrated sellers took it off the market after a buy/sell agreement fell through at the last moment as the buyer backed out losing their earnest money.  The owners live in the house I am looking to put an offer on and would like to continue to live in it upon selling as tenants.  This works well for me as I am looking to purchase the property as an investment property and would gladly rent it back to them.

The owners are looking to build a new house in the country-side and live in the current property while they build and perhaps would move into a camper on the lot while they build if the property needed to be vacated but wouldn't be ideal as the couple has a daughter.  

The bank won't finance me on this deal as I won't qualify for another mortgage in the next few months as I just closed on another property. 

I haven't presented any kind of offer or mentioned anything about seller financing yet.  My questions for discussion are as followed:

1)  If the owner/seller still has a mortgage on the property can I still engage in seller financing?  Do I somehow get the mortgage transferred over to me?  

2)  Most likely the seller/owner will need the capital from selling this property to build a new place.  It might be difficult to convince them to an agreement.  Any advice on how I can pitch a win-win for both parties? 

I am guessing they will need to drill a well, bring in electricity, initial dirt work, etc.  I do have cash and could offer up to 20% down which should get the ball rolling on their residential development.  Perhaps I allow for the owners to live in the property during the duration of the seller-financing terms if they choose while they build?  How long would the seller financing terms be?  

3)  I have a lawyer who has written up contracts for me, should I go to him to write up a seller-financing agreement?

4)  A real estate agent did bring this opportunity to the table, how does she get paid?  Can she represent both parties? 

Thanks for all the advice, this property checks all the boxes for me in an up-and-coming market of SW, Montana!!!

Corey





 

Originally posted by @Corey Meyer :

Greetings Everyone,

Thanks for clicking on my post!  

I am in the initial process of creating a "seller financing offer" to a homeowner who is interested in selling a single-family residential home.  The backstory is that this house sat on the market for a long time and the frustrated sellers took it off the market after a buy/sell agreement fell through at the last moment as the buyer backed out losing their earnest money.  The owners live in the house I am looking to put an offer on and would like to continue to live in it upon selling as tenants.  This works well for me as I am looking to purchase the property as an investment property and would gladly rent it back to them.

The owners are looking to build a new house in the country-side and live in the current property while they build and perhaps would move into a camper on the lot while they build if the property needed to be vacated but wouldn't be ideal as the couple has a daughter.  

The bank won't finance me on this deal as I won't qualify for another mortgage in the next few months as I just closed on another property. 

I haven't presented any kind of offer or mentioned anything about seller financing yet.  My questions for discussion are as followed:

1)  If the owner/seller still has a mortgage on the property can I still engage in seller financing?  Do I somehow get the mortgage transferred over to me?  

2)  Most likely the seller/owner will need the capital from selling this property to build a new place.  It might be difficult to convince them to an agreement.  Any advice on how I can pitch a win-win for both parties? 

I am guessing they will need to drill a well, bring in electricity, initial dirt work, etc.  I do have cash and could offer up to 20% down which should get the ball rolling on their residential development.  Perhaps I allow for the owners to live in the property during the duration of the seller-financing terms if they choose while they build?  How long would the seller financing terms be?  

3)  I have a lawyer who has written up contracts for me, should I go to him to write up a seller-financing agreement?

4)  A real estate agent did bring this opportunity to the table, how does she get paid?  Can she represent both parties? 

Thanks for all the advice, this property checks all the boxes for me in an up-and-coming market of SW, Montana!!!

Corey


Yes, you could do a Wrap.

The mortgage stays in their name and a new mortgage is created between you and the seller. Your attorney can do that for you.
Don't EVER let a real estate agent represent both sides. Even though it's legal and they say they can remain "neutral" it's like you coaching your son's basketball team and you coaching the other team at the same time for the same game. Only difference is there's thousands of dollars at stake with real estate and unless you are a heavy gambler there is little or no money at stake in your son's basketball game.  There is a conflict of interest.

@Mike M.  Thanks for the response. Roger on the "Don't EVER"  

Let's play hypathetical:

I take out a mortgage with the seller (they become the bank)  for a set time period.  I pay them a monthly mortgage.  They then pay a monthly mortgage to their bank.  Once my terms are up with the seller I then buy out their mortgage either with cash or with a bank I find that is willing to finance the deal.  

What happens in the event that during my contract with the seller, the seller for some reason defaults on their mortgage to the bank?  Let's say they are funneling the money I am paying monthly to them for some alternative cause or need.  Their bank forecloses on them, do I lose out?   If I put 20% down initially and paid a monthly mortgage for multiple years and then the seller defaults on their personal mortgage on the property, what happens? 

Perhaps this would be a clause written by my attorney, that in the event that this should happen, I get what? The bank the seller has the mortgage with really has nothing to do with me, and they aren't likely going to care if I paid the seller x-amount of dollars for the house if they never were getting paid.  They will cease the house and I will be out of luck...?


Corey


Originally posted by @Corey Meyer :

@Mike M.  Thanks for the response. Roger on the "Don't EVER"  

Let's play hypathetical:

I take out a mortgage with the seller (they become the bank)  for a set time period.  I pay them a monthly mortgage.  They then pay a monthly mortgage to their bank.  Once my terms are up with the seller I then buy out their mortgage either with cash or with a bank I find that is willing to finance the deal.  

What happens in the event that during my contract with the seller, the seller for some reason defaults on their mortgage to the bank?  Let's say they are funneling the money I am paying monthly to them for some alternative cause or need.  Their bank forecloses on them, do I lose out?   If I put 20% down initially and paid a monthly mortgage for multiple years and then the seller defaults on their personal mortgage on the property, what happens? 

Perhaps this would be a clause written by my attorney, that in the event that this should happen, I get what? The bank the seller has the mortgage with really has nothing to do with me, and they aren't likely going to care if I paid the seller x-amount of dollars for the house if they never were getting paid.  They will cease the house and I will be out of luck...?

Corey

 You have to set up an account with a mortgage servicer, usually an escrow company that charges about $10 a month. You send your check to them. They take money from that check and send in the seller's payment to the mortgage company and they send whatever is left over to the seller.

Originally posted by @Eric Mayer :

@Mike M. How do they get around the Due On Sale Clause? Or is this for older mortgages only? Thanks.

 Virtually all single family residence mortgages have a Due on Sale clause these days and have had for years. As long as the mortgage is paid on time there is little likelihood that the loan will be called. Banks just want to be paid and to be paid on time. They don't want the hassles of owning property. 

That being said, for clarification for anyone reading this, you are not required to notify the bank that title is transferring, it's perfectly legal when done the right way, if you do contact them they will call the loan due which they have a right to do but are not required to do, there are solutions if they do call the loan due.

If you buy a property using Seller financing, Land Contract, Wrap or Subject To make sure you have plenty of cash reserves, use title and escrow and have the transfer deed recorded. I never use a Land Trust (which is entirely different than a Land Contract) to hide that the title is transferring, it looks needlessly suspicious.

If you want to do these and do a lot of them especially, get proper training from someone that has done them for a long time. Don't just read about them and attempt to do one. Don't let someone who has done only one be your mentor. There are too many things to avoid to write about here. There are too many things you have to make sure of to write about here as well. Pay for the wisdom of how to do these correctly. You Will pay one way or the other and the other way is not pleasant and involves lots of paperwork, lots of questions from people with law degrees and meeting a judge or two. I've done these for 25 years and I've made every mistake you can imagine and a few mistakes I made up on my own that nobody knew were mistakes :-) So, to get an idea why this is so powerful and has made me a LOT of money read this spreadsheet

3 Ways to Wealth in Real Estate – Fix & Flip, Buy & Hold, Turnkey (Cash flow) – Here’s How

https://www.biggerpockets.com/forums/311/topics/780022-3-ways-to-wealth-in-real-estate-cashflow-flip-hold-here-s-how

Originally posted by @Mike M. :
Originally posted by @Eric Mayer:

@Mike M. How do they get around the Due On Sale Clause? Or is this for older mortgages only? Thanks.

 Virtually all single family residence mortgages have a Due on Sale clause these days and have had for years. As long as the mortgage is paid on time there is little likelihood that the loan will be called. Banks just want to be paid and to be paid on time. They don't want the hassles of owning property. 

That being said, for clarification for anyone reading this, you are not required to notify the bank that title is transferring, it's perfectly legal when done the right way, if you do contact them they will call the loan due which they have a right to do but are not required to do, there are solutions if they do call the loan due.

If you buy a property using Seller financing, Land Contract, Wrap or Subject To make sure you have plenty of cash reserves, use title and escrow and have the transfer deed recorded. I never use a Land Trust (which is entirely different than a Land Contract) to hide that the title is transferring, it looks needlessly suspicious.

If you want to do these and do a lot of them especially, get proper training from someone that has done them for a long time. Don't just read about them and attempt to do one. Don't let someone who has done only one be your mentor. There are too many things to avoid to write about here. There are too many things you have to make sure of to write about here as well. Pay for the wisdom of how to do these correctly. You Will pay one way or the other and the other way is not pleasant and involves lots of paperwork, lots of questions from people with law degrees and meeting a judge or two. I've done these for 25 years and I've made every mistake you can imagine and a few mistakes I made up on my own that nobody knew were mistakes :-) So, to get an idea why this is so powerful and has made me a LOT of money read this spreadsheet

3 Ways to Wealth in Real Estate – Fix & Flip, Buy & Hold, Turnkey (Cash flow) – Here’s How

https://www.biggerpockets.com/forums/311/topics/780022-3-ways-to-wealth-in-real-estate-cashflow-flip-hold-here-s-how


Seller financing is a mathematically bad idea. Their payment is fixed and your interest income decreases every year. As a landlord the rents keep growing as do the principal payments....the advantage is only to tenants.

 

Originally posted by @Jack B. :
Originally posted by @Mike M.:
Originally posted by @Eric Mayer:

@Mike M. How do they get around the Due On Sale Clause? Or is this for older mortgages only? Thanks.

 Virtually all single family residence mortgages have a Due on Sale clause these days and have had for years. As long as the mortgage is paid on time there is little likelihood that the loan will be called. Banks just want to be paid and to be paid on time. They don't want the hassles of owning property. 

That being said, for clarification for anyone reading this, you are not required to notify the bank that title is transferring, it's perfectly legal when done the right way, if you do contact them they will call the loan due which they have a right to do but are not required to do, there are solutions if they do call the loan due.

If you buy a property using Seller financing, Land Contract, Wrap or Subject To make sure you have plenty of cash reserves, use title and escrow and have the transfer deed recorded. I never use a Land Trust (which is entirely different than a Land Contract) to hide that the title is transferring, it looks needlessly suspicious.

If you want to do these and do a lot of them especially, get proper training from someone that has done them for a long time. Don't just read about them and attempt to do one. Don't let someone who has done only one be your mentor. There are too many things to avoid to write about here. There are too many things you have to make sure of to write about here as well. Pay for the wisdom of how to do these correctly. You Will pay one way or the other and the other way is not pleasant and involves lots of paperwork, lots of questions from people with law degrees and meeting a judge or two. I've done these for 25 years and I've made every mistake you can imagine and a few mistakes I made up on my own that nobody knew were mistakes :-) So, to get an idea why this is so powerful and has made me a LOT of money read this spreadsheet

3 Ways to Wealth in Real Estate – Fix & Flip, Buy & Hold, Turnkey (Cash flow) – Here’s How

https://www.biggerpockets.com/forums/311/topics/780022-3-ways-to-wealth-in-real-estate-cashflow-flip-hold-here-s-how


Seller financing is a mathematically bad idea. Their payment is fixed and your interest income decreases every year. As a landlord the rents keep growing as do the principal payments....the advantage is only to tenants. 

I think you misunderstand the math. Did you even look at the spreadsheet provided?
Actual numbers are more reliable than loosely formed opinion.


3 Ways to Wealth in Real Estate – Fix & Flip, Buy & Hold, Turnkey (Cash flow) – Here’s How

https://www.biggerpockets.com/forums/311/topics/780022-3-ways-to-wealth-in-real-estate-cashflow-flip-hold-here-s-how

@Mike M.

Thanks for your knowledge on the subject. I will continue to pursue seller financing with this deal and believe a Wrap-a-round Mortgage may be the best option.  I do like that that owners would like to become the tenants and believe setting up a mortgage servicer safeguards the original mortgage by ensuring it is getting paid. 

I am totally fine with the Due on Sales Clause, I like a little risk sprinkled into my deals, it makes me feel alive haha!

 In this situation, since the seller becomes the tenants in the wrap-around mortgage would I collect rents from the seller and pay the mortgage servicer.  Most likely I will need to pay a little more than what I collect from the tenant which is the seller?  This is the difficult part, since I would likely compromise on a higher interest rate mortgage than the sellers original to benefit them on going in on the creative financing deal.  To off-set this rate hike, I would raise the rent on the tenants I place in the unit. However, the tenant will be the seller....?  

Any thoughts on what you might do?

Final question and I thank you again, Mike, for your expertise on the subject!!!  How long would you set up terms for a wrap-around-mortgage?  

@Jack B. All seller financed terms are negotiable and I often get better terms than a bank would give me. My down payment is always less than 15% for starters. I’m about to close on my 13th owner financed door. 13% down, 5.5% interest amortized over 30 years, 5 year balloon. I’m working on selling my conventional financed properties just to pursue owner financed deals because I can get twice as many doors.

@Corey Meyer

Check out the Creative Financing For Real Estate Investors Podcast. Really great, detailed, and technical content on seller financing. Prepare to give the content your undivided attention though. The information is very technical and at times dense. Provides you with a free fast track for a seller financing education though. And like any typical class, the content in each episode builds on the last episode, so start at the beginning.

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