How to structure seller financing deal
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Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes
4yOriginally posted by @Sandy D.:
I own a five unit MF in Huntsville, TX on 10 acres. I am a newbie and this is my first and only investment property. Someone wants to purchase using seller finance so his daughter can live across the street from him. How do I structure this deal when it still has debt service and rental income?
I bet any of you can offer some kind of guidance here and it will definitely help me - good, bad, or ugly. I can offer number if anyone is willing to crunch numbers with me. Thanks!!
The structure:
- Existing debt stays in place, and you remain as the borrower.
- Wrap the existing loan in a new loan to your buyer. These are called wraparound loans. The buyer pays you each month, you pay the underlying loan.
- The buyer will give you a promissory note and deed of trust. The deed of trust is recorded with the county recorder. Your attorney will actually draft these.
- The buyer will also give you an "assignment of leases and rents" which entitles you to rental income in the event they do not make note payments to you.
- Upon closing, engage a licensed loan servicer to collect borrower payments, make payments to your lender, deposit the difference each month to your account, issue tax reporting, and ensure general legal compliance.
- Require that your borrower obtain insurance which names your lender as the first loss payee and you as the second loss payee.
Tips:
- Texas recently passed new legislation concerning wrap lending. You need an attorney to structure these anyway. Ask yours about the new legislation and make sure they're up to speed on it.
- The loan to your buyer should have a higher interest rate, larger monthly payment, and longer term than the number of payments remaining on the underlying loan.
- Most investment property is held in an LLC or other business entity. Insist that your borrower also provides a personal guarantee so that they are personally liable in the event of default.
7 Replies
- Rental Property Investor · Huntsville, AL · Member since 2015 · 181 posts · 136 votes4y
Why can't the buyer use regular financing?
- Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes4y
Originally posted by @Sandy D.:
I own a five unit MF in Huntsville, TX on 10 acres. I am a newbie and this is my first and only investment property. Someone wants to purchase using seller finance so his daughter can live across the street from him. How do I structure this deal when it still has debt service and rental income?
I bet any of you can offer some kind of guidance here and it will definitely help me - good, bad, or ugly. I can offer number if anyone is willing to crunch numbers with me. Thanks!!
The structure:
- Existing debt stays in place, and you remain as the borrower.
- Wrap the existing loan in a new loan to your buyer. These are called wraparound loans. The buyer pays you each month, you pay the underlying loan.
- The buyer will give you a promissory note and deed of trust. The deed of trust is recorded with the county recorder. Your attorney will actually draft these.
- The buyer will also give you an "assignment of leases and rents" which entitles you to rental income in the event they do not make note payments to you.
- Upon closing, engage a licensed loan servicer to collect borrower payments, make payments to your lender, deposit the difference each month to your account, issue tax reporting, and ensure general legal compliance.
- Require that your borrower obtain insurance which names your lender as the first loss payee and you as the second loss payee.
Tips:
- Texas recently passed new legislation concerning wrap lending. You need an attorney to structure these anyway. Ask yours about the new legislation and make sure they're up to speed on it.
- The loan to your buyer should have a higher interest rate, larger monthly payment, and longer term than the number of payments remaining on the underlying loan.
- Most investment property is held in an LLC or other business entity. Insist that your borrower also provides a personal guarantee so that they are personally liable in the event of default.
Thanks so much! This is super helpful info. My follow up questions are: 1. The wraparound loan is evidenced by the promissory note but doesn't the "lender", that would be me in this case, create the note? 2. The buyer wanted to use the cash flow to pay for their wraparound loan payment. How do we calculate payment amount?
- Investor · ND · Member since 2021 · 49 posts · 16 votes4y
@Marco Bario Hi, Marco. I have a question. I am interested in getting into seller financing and using it to acquire commercial properties, but I have much to learn. Would I need to have a loan servicing company handle the payments for me if there was no mortgage on the property?
- Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes4y
Originally posted by @Valerie Post:
@Marco Bario Hi, Marco. I have a question. I am interested in getting into seller financing and using it to acquire commercial properties, but I have much to learn. Would I need to have a loan servicing company handle the payments for me if there was no mortgage on the property?
Good question Valerie -
Generally, when you're a buyer making payments to a seller, it's the seller who will decide where payments should be sent.
If you're trying to entice a seller to sell "on terms" (seller financing to you), then you might let them know how a licensed loan servicer could make their life easy by collecting payments on their behalf, transferring proceeds directly to their checking account, issuing monthly statements and sending annual tax filings. A servicer can also escrow and make payments for property tax and insurance payments - which is another benefit to the seller because they know they're more likely to be paid when a third party is handling it.
Point of clarification - your question included the phrase "no mortgage on the property." Seller financing still relies on mortgages or deeds of trust to create a lien on the property. Some states are "mortgage states" and others are "deed of trust states"
What state are you looking to acquire commercial property in?
- Investor · ND · Member since 2021 · 49 posts · 16 votes4y
@Marco Bario Thank you--great to know! I am looking at property in North Dakota. I should have stated, no existing mortgage on property.
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