Would you?

14 Replies

Would you be willing to sell a property on a wrap to a tenant ? The tenant wants the property and cannot qualify due to a bankruptcy from a pervious marriage 2 years ago. However, the tenant has a great paying job and in the past 2 years has saved up 30k with the plan to use it as a down payment for the house. 

The property is a 0 cashflow every month, but I do have a good chunk of equity in the property.

The tenant has always paid on time in the past 2 years as well. 

I was thinking that with 30k down I would be able to find a property that I could cash flow on and also the tenant would benefit by owning the property. I would have an attorney or title company or whomever I need to service the loan for me. 

If you would sell this way . What would you feel is a fair interest rate? My current interest rate is 4%.

@Aaron Junck

Absolutely, but it must be done according to applicable statutes. Your state may have regulations on interest rates allowed, but here in Texas 7% to 9% is typical. 

I would jump all over it. I would make sure i have a lawyer draw up all the paperwork and make sure its all above board. 

@Guy Gimenez  Thanks for the feedback. I feel it would be a win win for everyone, I just want to get a feel of what all of you on here would do in this situation. :)

@Peter MacKercher  That is my plan :). I definitely don't want to mess it up for either of our sakes.

@Bill Gulley   What are your thoughts. I always love hearing what you have to say :)

Well, typical "investor" thinking. The guy has $30K, and you want it all!

Is that a $300K home? (I doubt it) Is it a $150K home? (I still doubt it).

Yes, you want a down payment, enough to move on to a better property, not a castle, but something that is a better investment.

Frankly, you have a tenant that may save your tail from a poor investment, is that valuable to you?

Do you think that when this buyer will need to refinance his lender will want to see reserves and savings, or that it's just fine for him to be cleaned out, having to start saving all over again while making payments on your Sub-To deal?

You aren't a homeowner occupant, you're a RE dealer, operator, investor, so laws are different as to exceptions to Dodd-Frank, while you may have an exemption from that Act, you are still subject to predatory lending issues. To ensure you don't devise some deal that is skewed, trying to grab all that can be had, you need to see a RMLO to originate the loan side.

Never met an investor type property owner that thought their property was worth less than its market value, they all think it's at or above market value, after all, they own it. (LOL)

Saying you have tons of equity might be the case, I'd suspect that is overstated, but an appraisal will show that. If you are under Dodd-Frank, that RMLO may have it appraised when required.

If you are not under the DF Act, I'd suggest you get a BPO, (Broker's Price Opinion) to CYA yourself, you may be able to sell for a tad more as any conventional sale can have the difference between an agreed sale price and appraisal to be paid in cash and this buyer probably has that, but, sending that buyer off broke after settlement has significant issues. Getting a buyer to agree to a grossly overstated price also has significant issues, it needs to appraise out for future financing with the equity established, or near that amount, as earned from the transaction.

So, a fair price, a fair down payment, terms that are conventional for the type of credit extended, interest isn't pulled out of the air, it reflects risk assumed, but such deals do run around the 7 to 10% realm, you do need to ensure that seller financed usury laws are followed, if any.

If DF does not apply, prudent lending still will, the buyer's credit issues must have plenty of time to be cured by the time you ask for any balloon payment, if you can require a balloon payment. Only someone with underwriting knowledge can really judge the time required in light of all other debts, a new payment, past credit sins and informing the buyer what they must do in order to qualify later on,  the RMLO should be able to do that, should be able, at least having them involved peels away your liability that can be inferred if your deal blows up. Most seller financed deals generated by investors without professional help do fail and the failure can almost always be traced back to the origination and lack of underwriting prudence. In the past, predatory issues were not in the forefront of seller financing as the matter is today, so go forward with prudence and understand, your deal gives you no entitlement to reach to the bottom of your buyer's pockets.

It sounds to me like you may have a good buyer, at least while his wings are clipped, he sounds otherwise strong, you need to cure the credit matter and time will be required, don't bump a buyer up against the minimum qualification time wall, lenders can require more time, seasoning on the type of loan to be made. They also need some lag time after qualification in order to obtain financing, so don't cut it close or they will be in default before a loan can be made!

Well, you may not like what I had to say, let's get to reality and follow up the right way, good luck with your possible deal and this buyer pulling your poor investment out for you. :)

    

@Bill Gulley  Thats exactly what I am saying. You always have some good insightful views. :)

To clarify more for you.

This house was my personal house for until nov of 2012. I built it back in 2006.

The housing market was soft when I wanted to sell it so I put it out for a lease option and found this tenant. At the time he went through a divorce and his ex supposedly messed up their credit by stop paying on things they had jointly. He told me he would be willing to put 10K upfront for the option to buy it but he wanted a long term lease bc he knew he would be filing for bankruptcy in a few months to be able to start over. ( Yes, I know I shouldn't do a long term lease). The price we agreed upon was just shy of 250k this was from an appraisal I had when I refinanced in 2009 , it also is right in line with the tax assessed value. Seeing what properties have been selling for in that neighborhood I would be hard pressed not seeing it sell for worst case scenario 265+

We wrote up the lease and option and all has went well. He has paid on time ever since.

I am not 100% sure if he can or cannot qualify conventionally yet. I know he is self employed (I know how hard that is to qualify in itself) . He said his bankruptcy will have been 2 years come June so he is not sure if he could qualify yet bc of that , but he does have close to 30k saved up now he said.

Back when I did the lease option for him rents were lower and a 250k house was not moving in any parts of my city unless it was a steal. ( I wasn't about to give up my equity just to dump the property) That is why it cash flows 0. In my head I would get L/O it out and in essence have a savings account from what principle is being paid down every month.

My initial thoughts were this. Let him see if he could qualify from a lender . He has 10k in option consideration and his close to 30k saved up . on 250k thats roughly 16% down. 

If the mortgage company won't do it I would have a RMLO qualify him based on debt to income not his credit score. Keep in mind I have had him for 2 years making timely payments already. I am ok doing a new appraisal if need be or do you think I could get a BPO and that would suffice? Either way the option agreement states the just under 250k for an agreed upon value so if it comes in lower than that I guess I would have to adjust accordingly (which I can't see happening). The beauty of this is by going to a 7% interest rate I would make money on the spread in interest since I am at 4%.

Any ideas on how a servicer charges? Do I pay them a 1 time upfront fee or is it a monthly fee?

Oh and to enlighten on the good chunk of equity... I would still have about 10k left in this property if he put 30k down. To some that is not a lot, to me anything over 10k is a good chunk of change. So as it sits right now, based off of the option , 250-10-30= he would be at 210 I owe right at 200 for it. Like I mentioned above I refi in 09 so I left some equity in the property .

Well great, my guess was wrong, I expected the run of the mill rental :)

I suggest you move that deal to a note and deed of trust, all inclusive DOT, take it to a attorney and a RMLO. Have the RMLO order an appraisal, the buyer pays for it. This keeps both of you out of influencing the appraisal. If he can qualify, sell it. If not, carry your note for 3 years, that puts him 5 years (4 1/2) away from financing.......if DF does not apply, if it does, follow the RMLO's requirements. Before you let him make that note, get a loan servicer, give them the details and agree to set up servicing from settlement, you, he or both can pay the servicing fees. You need the servicer prior to settlement as you will have APR disclosures and have the servicer figure the override of interest, an RMLO may not be able to do that, I don't know their abilities or software used. Run it past your attorney.

He should get to 20% down to avoid PMI, his credit history will be easier to take that way.

Show your deposits from his past 2 years of rental payments, they can't just take your word for it that he paid as agreed since you have something to gain. Hope you deposited rents in a timely manner. Just see the RMLO.

That's how I would approach it. Good luck! :)

@ Bill, Do you recommend me putting it into a revocable trust prior to minimize the risk of DOS?

@Bill Gulley  undefined

I wouldn't, a servicer really helps in such situations, but if you would feel better and the buyer agrees to purchase from the Trust, have at it! Do Good!  :)

@Bill Gulley Would you do anything different considering my state (SD) is a mortgage state not a DOT state. Therefore, if a foreclosure would take place I would have to proceed through the judicial system...

Well maybe you could clarify or send me in the direction to find out if SD allows deed of trust. I seen 2 conflicting sites . 1 says no and another states you can.

@Aaron Junck  is your tenant doing anything to improve his credit or working with a lender to ensure he will qualify when his bankruptcy is over? You should ensure he is putting himself in a position to be able to qualify when the time comes. 

A mortgage is a note and security agreement as a single agreement, unless there is a boiler plate form in SD, you may need an attorney to draft the mortgage as an all inclusive obligation giving the seller a secured position.

Use what is customary and acceptable, don't take advice off the internet, get your information from a closing/title company as to what is usually used or your attorney, or both. :)

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