Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
Hi BP,
I am trying to do some creative financing with my current potential deal. I want to do seller finance with the owner who does not own his property free and clear. He told me that generally, the rules of Seller finance means that the property is typically paid off, if he agrees to seller finance with me the bank will force him to pay the remaining balance on the property. I do not have a big enough down payment or funds to help him pay off the remaining balance.
So my question is, could I somehow assume over his mortgage, take over a conventional mortgage and lets say put down 10-15% of the difference between the purchase price and his mortgage? Is this even possible or legit? I am trying to see what I could do in this position to make this deal work. Thank you BP.
I am trying to do some creative financing with my current potential deal. I want to do seller finance with the owner who does not own his property free and clear. He told me that generally, the rules of Seller finance means that the property is typically paid off, if he agrees to seller finance with me the bank will force him to pay the remaining balance on the property. I do not have a big enough down payment or funds to help him pay off the remaining balance.
So my question is, could I somehow assume over his mortgage, take over a conventional mortgage and lets say put down 10-15% of the difference between the purchase price and his mortgage? Is this even possible or legit? I am trying to see what I could do in this position to make this deal work. Thank you BP.
How much equity is there in the deal? EG, are you getting a property that would appraise for $750k, for $650k?
I am trying to do some creative financing with my current potential deal. I want to do seller finance with the owner who does not own his property free and clear. He told me that generally, the rules of Seller finance means that the property is typically paid off, if he agrees to seller finance with me the bank will force him to pay the remaining balance on the property. I do not have a big enough down payment or funds to help him pay off the remaining balance.
So my question is, could I somehow assume over his mortgage, take over a conventional mortgage and lets say put down 10-15% of the difference between the purchase price and his mortgage? Is this even possible or legit? I am trying to see what I could do in this position to make this deal work. Thank you BP.
How much equity is there in the deal? EG, are you getting a property that would appraise for $750k, for $650k?
I have assumed mortgages that were held in portfolio by a local bank before but I'm sure it's not the norm. They know me and I know who to call to ask. The process of assumption is similar to formally qualifying for a new mortgage.
If it's a large bank or broker that originated the debt then sold it off to a fannie/freddie backed program - no way. Have to pay it off or hope they don't find out you 'took it over'.
Although the probability of action on the DOS by the lender in a wrap is low (I auto-pay mine through my mgt co acct), it is a risk for your seller. The lender will most likely discover it when you change or add yourself on the property insurance. Insurers always notify the mortgagee.
I will ask again what @Chris Mason asks - what will the LTV be? Debt and PP to asset value? How much equity are we talking about? Is it a conforming asset for it's zoning @Bryan Pham?
@William Hochstedler, I just learned something new just now, thank you! Do you know the process to start a wrap mortgage? Would I just walk into a local bank and ask them?
@Chris Mason@Steve Vaughan Hi Steve, reading your comment has made me realized maybe I was looking at this deal all wrong. The property is located in LA, my main objective was to find a property that will produce positive cash flow and the intangibles is that it will be close to my parents. The PP price will be close to the ARV of 800K. I sat down with the owner, ran some numbers and it meets my requirements. The only thing that concerns me with this property is that it is located in a rent controlled area with a yearly increase of 3%.
I found that deals that include good amount of equity and positive cash flow in a desirable area of LA is nearly impossible to find (unless I have a massive down payment). My age old question for you guys is, would you prefer cash flow or appreciation? and why?
This isn't something you do with the bank. You work directly with the seller.
There's a ton of info on this. Hopefully, I've given you some search terms. Other popular terms used are "subject to" or Sub2 meaning subject to existing financing.
@Steve Vaughan Do you know of any good resources for seller financing basics? I think @Bryan Pham, you need a little more education before we teach a whole course on seller financing here on this thread.
My age old question for you guys is, would you prefer cash flow or appreciation? and why?
Bryan, depending on where you are financially would slant my answer.
If you have a strong w-2 career and are just looking for a store of value that will most likely increase over time, appreciation is fine. The tax benefits of depreciation if a higher income earner especially would be a definite bonus!
If starting out with a ho-hum job (not a career) and needing the money more, cash-flow would be the only answer for me. When I started I needed cash-flow to be freed from the rat race. It was a necessity.
Now I could go either way, but I won't pay retail no matter what. I am an investor at heart and need value at the buy. RE is too much work to over-pay. I'd rather buy index funds. You could be different. Good luck!
@Chris Mason, equity wasn't my main focus in this particular deal. I wanted a property that will produce a positive cash flow.
Ok. My question about there being equity in the deal was in regards to this:
About a year ago, Fannie Mae removed the continuity of obligation requirement for rate and term refinances. That's a bunch of gibberish mortgage speak, but what it amounts to is that if there's sufficient equity in the deal, you might be able to get that mortgage into your name and put 0% down, all legal, above board, no 'due on sale' hovering over you, no guru 'subject to' stuff, etc.
There is a lot of "it depends on..." in between "might be able to..." and "yup, we can do this!" but generally I would assume that you like the idea of 0% down (or as close to it as possible) on an investment property to get a regular 30YF at a normal interest rate, right? I mean, you're a BP member after all. :)
@William Hochstedler Thank you for your prompt responses. I guess the biggest question I have is trying to buy a property that is not clear and free from the owner. The owner wants to sell me his property but still owes a good amount left. I was wondering how this could work if we do some creative financing. The deal is still going to be worked out with the seller, but there are too many other variables I don't have the answers to. I will definitely read up more on seller financing. Thank you!
@Steve Vaughan Whew, that's a good answer. I currently do have a strong W-2 but my heart belongs in Real Estate and I want to focus full time into this eventually. I guess that subconsciously, I am already making decisions to get me to the end goal. Thank you for your feedback!
@Chris Mason@Steve Vaughan Hi Steve, reading your comment has made me realized maybe I was looking at this deal all wrong. The property is located in LA, my main objective was to find a property that will produce positive cash flow and the intangibles is that it will be close to my parents. The PP price will be close to the ARV of 800K. I sat down with the owner, ran some numbers and it meets my requirements. The only thing that concerns me with this property is that it is located in a rent controlled area with a yearly increase of 3%.
I found that deals that include good amount of equity and positive cash flow in a desirable area of LA is nearly impossible to find (unless I have a massive down payment). My age old question for you guys is, would you prefer cash flow or appreciation? and why?
Personally, both. Why? protection from the next down turn and awesome cash flow to service all the debt and pay the bills and to have some fun. Why not right?
Cash flow only with out equity is great but you have no flexibility you cant access your equity above 75-80% anyway (most banks cap out at 70-80% cash out on investment/multifamily). So if your loan is above 70-80% LTV relative to current FMV (fair market value) then you're not in a position to take out the existing debt (aka refinance). If the market turns (inevitably it will) or your commercial note comes due at the end of year 5 or 7 etc you should always factor in a pad or margin of error to make sure you can exit, sell, refinance, carry back paper, lease option, or combination thereof to get out if you need.
No one will know what the exit cap rates or ARV values will be in the future but it sure helps to know you have multiple options and flexibility.