Seller Financing

17 Replies

I have been trying to keep my ears and eyes open for any seller financing deals in my area. I would like to get a seller finance under contract then wholesale the deal. I am hoping that this can be a quick way to move the property and make something in the process. Does anyone the BP Community have any experience with this strategy and has it worked for you?

Hi @Edward Thornton . Yes, we have sold seller financed deals wholesale to investors. If structured right, they tend to move very quickly. Here's the challenge: I'd say the majority of seller financing deals are created, not found.

You will probably not see many seller financed deals not just because they don't linger, but also because many (most?) professionals (investors and agents) don't know how to put them together in the first place.

So, rather than looking for pre-fabricated deals, I suggest you look instead for:

  • sellers who own free-and-clear but have a vacant house in serious need of major repair
  • sellers with mortgages where the monthly payment is less than fair market rent, especially when there is little, no, or slightly negative equity
  • abandoned homes that have not (yet) been foreclosed on

You'll need a combination of MLS, tax records, and deed records to find and research these types of prospects. However, when you find the right opportunity, structuring seller financing is like creating money out of thin air!

Happy hunting!

Thanks. @Mitch Messer, I read your answer and found it to be very informative, but you wrote about sellers with mortgages where the monthly payment is less than fair market rent, especially when there is little, no, or slightly negative equity. Can you please explain that a little more to me as I am a newbie to the REI field. Because I am thinking that in case I not able to sell it I can rent if need be.

@Edward Thornton , glad you found my comments helpful! Thanks for the vote.

If the property has a mortgage with payments lower than fair market rent (FMR), you could buy by keeping the existing mortgage in place (called buying "subject-to" the existing mortgage), and then sell to an investor buyer with seller financing.

Say a property has loan payments of $800/mo (including principal, interest, taxes, and insurance). Let's assume FMR is $1100. If you passed this subject-to financing on to your buyer, they would realize a $300/mo cashflow with a placed tenant. They'd also be getting non-qualifying (i.e., their bad credit wouldn't matter), non-recourse (i.e., if they default, they'd only lose the house and not be personally liable for the debt) financing. Needless to say, non-recourse, non-qualifying loans are the "white unicorns" of financing: Everybody wants them! Here in Atlanta you could easily extract a $5-8K wholesale fee for a deal like this, depending on the condition of the house and the terms of the underlying loan.

Search here on BP for "subject to" to get more training on this incredible powerful strategy!

@Ben Leybovich

See, it's not just wholesalers, it's wholesalers and others trying to get creative. It's this type of stuff on BP that starts fires in the woods and then I have to spend my time putting them out!

I suppose the reason we clean up messes on BP is not just to inform posters, but to ensure other newbies don't try to do stupid, illegal and unethical things that cause messes, get others in trouble or get them sued, maybe worse.

You cannot devise a contract for a seller to provide financing and then assign that contract WITHOUT specific consent of the seller to accept that buyer as 1. their borrower or 2. taking the responsibility of paying on a Sub-To transaction!

Look up unilateral contracts or just take the easy way and believe it!

If you folks don't learn the basics you won't know anything to base your ideas on.

You go out there dreaming up how to pass paper around like dealing a deck of cards and you might get other paper to pass around while wearing an orange jumpsuit. :)  

@Mitch Messer, I am very grateful for all the knowledge you have imparted on me. I have to try any and every method that requires the least amount time, money, and third party hands. If the "white unicorn" works for me, you will be the first to know. I have to say Bigger Pockets is great. I started out listening to the podcast, and now I am speaking with knowledgeable REI's such as yourself. All this makes me feel like the future will be very bright as long as I follow in the footsteps of those who know.

Oy Vey...

Language needs to be in the Note or Land Contract specifically identifying what you are trying to do. If the seller is elderly, I'd stay away from this nonsense all together, unless you include their children into the language. 

Bill - Oy Vey!

@Ben Leybovich, so if I have a seller financing agreement. I would have to get the seller to agree to the terms of the sell before I can enter into a wholesale agreement with a potential buyer.

Originally posted by @Edward Thornton :

@Ben Leybovich, so if I have a seller financing agreement. I would have to get the seller to agree to the terms of the sell before I can enter into a wholesale agreement with a potential buyer.

 Yes. understand - what you are doing with any type of seller financing is seeking seller to agree to allow YOU to make payments. While the seller may, just may, have reason to believe that YOU are a good candidate not to stiff them, the seller has no such feeling toward anyone but you.

Unless you disclose to the seller upfront that this is your intention, and explain to them that YOU are not the one they are essentially putting their trust into, and the sellers agrees in writing - don't do it. Eventually someone will sue the *** out of you for specific performance, or something else. 

And then, there's Dodd Frank and all the rest of that regulatory junk. This is serious stuff - half-assing it is ill advisable :) 

@Ben Leybovich, My intentions are to never do anything illegal because it will only make me look bad in the end. I want to find ways to use the least amount of outside funding possible. There is creative financing and illegal financing and this will go into the illegal financing category for me. I am very glad that  the errors was shown to me before I even tried to use this method.  

@Edward Thornton

Hi Edward

I have had good success with seller financing.  You do need a motivated seller or a property that offers a unique problem that can not be financed through traditional means.  You can also educate a seller who has a ton of equity on a property and ask what he is going to do with the proceeds. If he is just going to put in the bank, offering him 4-5% on his money and deferring capital gains may be a good alternative.

There are brokers out there who will tell you these deals don't work.  Look for another broker.

Good Luck

Gino

@Gino Barbaro, I am currently working within a seller financing deal and I have been doing some renovations to the property getting it ready to rent. I recently was introduced to someone looking to owner finance their home in an area near my current property. I didn't want the burden of holding both with little to know help rehabbing so I wanted to off load the later. I think I may just have to walk away from the second deal and just focus on the one I'm in.

@Edward Thornton , I want to be clear. At no point was I suggesting you assign the contract to purchase "subject to" to your buyer. When I spoke of "passing the financing on" I was speaking only of the payment amounts. You'll want to remain in the middle to ensure your seller's payments get made, even if your buyer eventually flakes out and you have to take the property back and make good on the commitment. We typically do ours via a wraparound mortgage.

Also, if you're buying as an investor and only selling to investors, I don't see where Dodd-Frank would come into play.

"Subject to" is a powerful tool, and you absolutely need to learn how to use it responsibly. Used properly, there's nothing illegal, immoral, or inappropriate in its use. The key is to do your homework and don't be discouraged.

@Mitch Messer, That's where all my confusion began, because the way I took it was that I would still be in the middle collecting the payment( like a rent payment ) ,still paying the original owner our agreed upon payment.

@Mitch Messer and @Edward Thornton you actually need to be careful of the Dodd/Frank Act.  If you buy a house with owner financing and possibly a subject to with an existing mortgage there are several problems.  First is the due on sale clause.  EVERY mortgage drawn by anyone who knows what they are doing has a due on sale clause.  This means if the property or any portion of the ownership are sold the mortgage holder has the right to accelerate the mortgage and have the entire balance due immediately.  I have done these, they are dangerous, but often the banks will not call the note as long as it is not rubbed in their face and no one is late with a payment or insurance policy or taxes.  However the bank can.  Next if they have a mortgage payment below market rent, and you put the purchase contract in your name for lets say the $300 difference, you still have to pay to replace the water heater, replace worn out carpet, fix plumbing , replace the roof, etc.  You may have heard of the 50% rule, that is usually the cost of keeping a property up versus the rental income.  If the rental income is $1,100 the you can figure about $550 in costs monthly to keep it up.  That includes however taxes and insurance which may or may not be part of the mortgage payment as escrow.  Who is going to buy that property from you and give you money for it?  There is not enough fat for another investor to make money from any of these deals.  That leaves people who want to buy their own home.  Those are the people who pay the most for houses.  When you sale to someone who is going to occupy the property Dodd/Frank kicks in.  There are not many exceptions, it was not your primary residence, and you are the one financing the property.  Are you a legally licensed loan servicer?  When a bank loans money they do it based upon your credit rating and assets, that is why you cannot assign a loan.  You can have the owner finance the 20% down the bank wants to give a commercial loan, if he is willing to take a 2nd mortgage behind the bank.  Then you buy the property in your name and rent it or sale it.  These deals can be done sometimes but they are pretty risky and can easily run afoul of Dpdd/Frank.  I think that law hurt so many folks with bad or little credit in their chance to buy a home, but it is still the law.

    Keep pushing and learning though, you will find your niche.  Good Luck

@Edward 

@Edward Thornton undefined

You're right, you do have to ask and often, ask the right question too. It can be hard asking questions in a public forum as you'll get all kinds of folks kicking in ideas and solutions. That's dangerous. So, you (and everyone) must to do some due diligence to ensure the person suggesting something is correct. The fact that they do something is not a reason to believe what they are doing is correct, legal or ethical or even the best way to do something. The number of posts someone may have is not an indicator of knowledge either. Neither is the amount of money they have made in real estate. If someone has fewer than 500 posts on BP, that indicates they are new here (most likely new to real estate) but is not an indicator of knowledge or ability. Look to the profile of members and try to understand who they are and why they are here, their agenda tells much about the advice they may give.

You may not like what you hear, more often than not, creative arrangements are shot down because the one suggesting the solution does not understand the root of the matter, what I call the "basics". 

Most who get into real estate investing (or operating) chase low hanging fruit from the tree, they don't really care to know why the tree is there, how it grew, how it produces the fruit, what direction the limbs will grow or to understand that everything comes from the roots. 

Without understanding those elements you can very well be picking poisonous fruit. 

Finance is not real estate. When "investors" get into financing the are leaving the real estate arena and walking onto the field of finance. Most should not be allowed past the gate, but it was left unlocked. In perspective operating in real estate is the 6th grade, finance is in graduate school. That's not to say a 6th grader can't make a note, but the origination, type of note, treatment of the note, collections and assignments are far above the 6th grade level. 

Find the worst sin in your state as to dealing in real estate and look to the penalty for doing something bad. That can hurt any investor. Now look to the penalties for doing bad things in financing. $100,000 fine and or up to ten years in a federal prison, that's per occurrence. The feds also like to tag on other violations to financial screw ups, like wire fraud, bank fraud, mail fraud, unlicensed brokerage activities and lending violations. This doesn't consider civil liabilities, messing up someone's financial life. Getting creative in this field can be a social death sentence, not saying any screw up is, just that it very well can be.

 I'm sorry this is so long, but there are several points to make, hope you're still reading, you're getting free expert advice, just saying I have been found in court as an expert in this area.

You need to begin by understanding contract law, the difference between types of contracts, a loan, mortgage or note is a unilateral contract. That carries specific requirements for one party, the borrower, also called the "Maker" lenders do not "make" loans, the borrower does, lenders originate or provide the financing. Unilateral contracts, as explained by @Ben Leybovich   are based on a lender relying on the personal or specific performance of the borrower. Because of that reliance, specific consent must be given by that lender. 

In a Subject-To transaction, the property owner is extending credit to the amount of the underlying mortgage, you are not assuming the mortgage, the seller is still on the hook for the mortgage and they are either extending credit for that amount by "wrapping" the mortgage under their loan or they are tying two separate obligations together one for the underlying mortgage and the other for any equity carried back. 

If you were to attempt to sell your Sub-To purchase, you cannot provide good title, you will have to sell on another subject-to contract giving a Special Warranty (or limited warranty deed) to your buyer. Just as the original seller is on the hook for their mortgage, you're on the hook for the extension of credit you made to them. You cannot assign your obligation to pay as agreed. 

Now, in that transaction to your buyer, you are extending credit, you are not Harry Homeowner, you are conducting business. When you provide financing as part of a business or being in the business, you are subject to mortgage brokerage laws. You are also subject to loan servicing laws as @Jerry W. pointed out (he is an attorney if you weren't aware). 

In reality, your buyer will most likely be an owner occupant, you might find a landlord depending on the price running a chain of contracts but not likely as @Jerry W.       pointed out. 

That means you will need to be Dodd-Frank compliant, following those rules. I'll bet a hundred dollars to your one, you won't have a compliant loan, even if you found a fool mortgage originator whom passed a test to originate mortgages, they still won't be compliant. 

Even if you did find a commercial end buyer, what can or will they do? Give a tenant an option to buy on two sub-to transactions? If that blows up, you're stuck in the middle, that isn't a safe place to be unless you have cash to take out the underlying mortgages. No conventional lender (or any lender in their right mind) will refinance your position with sale contracts or an option in front of them. You can't finance that property if you sold it!

What then? You could be sued, when you get sued your scheme unravels in court, the judge gets ticked off at your clever dealings and slams you with lending violations. 

Stay away from investors that do this or that in financing, there are no coaches or gurus that teach finance, financial law nor do they have a clue, you will need an attorney in your area that is familiar, better yet, knows financial laws that apply to your transaction. 

BTW, the only expert I know of that you might find on Dodd-Frank would be the attorneys at the CFPB or other regulatory agencies. Ken Rischel runs a compliance shop for lenders in chattel liens, he'd probably be the only "expert" on BP, I'm more than aware of it, but I don't claim expertise of that entire Act. We may have attorneys on BP that have studied the matter as well. 

When it comes to financing, you'd better make sure your teacher, mentor or whatever they might be has the education and experience to back up their instructions and they aren't simply passing on folklore about seller financing! :) 

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