Seller financing with a mortgage on the property
Hi BP,
Hope everyone is doing really well. I have an opportunity to buy an off market deal in Spring, right outside of Houston.
I have a few rental properties in Houston and looking to grow the portfolio but don’t have the down payment for this one right at the moment.
The seller mentioned he would be willing to a seller finance but when I spoke to my mortgage guy about this and mentioned the seller still had a mortgage he STRONGLY recommend I avoid.
Wondering if there are any creative ways to do a seller finance with a title transfer or something that could trigger the do on sale or worse mortgage fraud.
Thanks for the help!
Quote from @Stefan Hirniak:
Hi BP,
Hope everyone is doing really well. I have an opportunity to buy an off market deal in Spring, right outside of Houston.
I have a few rental properties in Houston and looking to grow the portfolio but don’t have the down payment for this one right at the moment.The seller mentioned he would be willing to a seller finance but when I spoke to my mortgage guy about this and mentioned the seller still had a mortgage he STRONGLY recommend I avoid.
Wondering if there are any creative ways to do a seller finance with a title transfer or something that could trigger the do on sale or worse mortgage fraud.
Thanks for the help!
This is called a Wrap loan and the sellers mortgage company HAS to approve to allow the sale. Even if they do approve, which most wont, the mortgage company retains first lien position which means if you stop paying the seller they still own the bank their monthly payment. It will be a pain to do, but as long as the mortgage company approves it is possible
#3 1031 Exchanges Contributor
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Many banks used to overlook these sales because they were collecting 3-5% interest in a seasoned owner occupant loan while market was 2-3% on a new loan. They were making extra in a safer loan. NOW, market is 5-7% so they’re actually losing money and it’s no longer owner occupant. If you try to rent it out with a landlord policy, instead of homeowners policy, with a different insured name, with non-homestead property taxes, with checks coming from a different payer, they might be more inclined to ask for their money back. Especially if we do have a. Recession or home prices stop skyrocketing.
As long as you’re willing and able to pay off the loan within 30-60 days of the demand letter, or willing to lose your downpayment and monthly payments, it’s certainly a way to get started while only risking $10’s of thousands.
Ps. This is all assuming the fed is lying and they don’t keep increasing interest rates further incentivizing the banks to get their money back.
Think about this for a second. Your loan officer is NOT going to get his commission if you do seller financing. Do you think he is going to recommend you do seller financing???
If you go to a new car dealer, they want to sell you a new car, if you say you want a used one, they will tell you a million reasons why you should NOT go used.
Wrap around mortgage is legal.
#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
- Austin, TX
You are doing something called a mortgage wrap. This does trigger a due on sale clause, but not if the bank never hears about it. There are ways to do this legally and never have the due on sale triggered. I’d recommend using a investor friendly title company to walk you through this. Ceshker title is top notch
Very legal. Easy to just deed the title back if the lender wants to pull the due on sale clause. Find a seasoned, investor oriented title company that knows the ins and outs of the whole thing. If your attorney knows what they're doing, conveys that to the lender, they aren't going to want to bother with it. More than likely.
When I started (around 2008) I'd do these all the time. I was always told "omg, you'll go to jail. It's illeagl. Due on sale". etc. However not only are they not illegal, I found the due-on-sale clause to be of low enough risk to make the deal worth doing. In all my research I couldn't find ANY examples of the due-on-sale being activated when the loan was performing.
Personally I love doing wraps (or 'loved' when I had no ability to get a new loan) but you for sure have to be willing to take on risk of doing a non 'normal' type of deal.
@Stefan Hirniak Listen to the BP Podcast with Pace Morby. He explains exactly how to do this with 4 or 5 different ways to structure the deal.
Right on, @Stefan Hirniak
You’d certainly want to try and get the deed as part of the deal. The due on sale clause is something that’ll rarely come up. As long as you AND the seller make your respective payments each month and remain consistent with things you’ll be fine. It’s certainly important to do your due diligence on the deal… A clean title, a current mortgage, and a good note are just a few things you’ll want to confirm with the seller. I believe he’d need to disclose that there’s a mortgage balance as part of the purchase agreement agreement anyway. I think to be compliant with TRID and or RESPA maybe? Either way you’ll want to dig into all that a bit. How would you confirm that his mortgage is being paid each month? And how would the taxes and insurance be handled each month/year? Just some things to consider and coordinate on if you do move forward with the deal… Creative finance deals (in my opinion) can be some of the most lucrative but they absolutely have to be handled a certain way. I think being a good person and practicing with integrity becomes especially important on these types of deals. Good working relationships and communication are key as there’s a lot of trust that is needed to get through the whole process. 🙂
@Stefan Hirniak I have to agree with @Bill Brandt that with the increase in rates a lot of these banks are going to look to implement the due on sale clause. I can easily see banks hiring a few dozen people to run reports, pull title, and send out letters. They are going to be sitting on BILLIONS of dollars of loans at below market rates. Best case is they will write a new loan at the current rate.
One of Paces methods is to purchase the property with a lease option with the option price being the remaining loan balance. Since the title does not change there is no due on sale. As I mentioned there are several ways of doing this covered in the podcast so listen and learn.
Personally I think subject too is going to be a HUGE opportunity as some people who bought in the last year are going to need to sell but will not be able to get out without writing a check. This will be a key tool to help these folks get out of a house that is underwater but has a low interest loan in place.
Quote from @Cody L.:Appreciate the message. Definitely looking into the wrap and going to find some investor friendly title companies to discuss with.
When I started (around 2008) I'd do these all the time. I was always told "omg, you'll go to jail. It's illeagl. Due on sale". etc. However not only are they not illegal, I found the due-on-sale clause to be of low enough risk to make the deal worth doing. In all my research I couldn't find ANY examples of the due-on-sale being activated when the loan was performing.
Personally I love doing wraps (or 'loved' when I had no ability to get a new loan) but you for sure have to be willing to take on risk of doing a non 'normal' type of deal.
Quote from @Bob E.:Thanks bob. Listened to this episode previously but didn’t pay it the attention it deserved. Got it pulled up again for another listen. Cheers
@Stefan Hirniak I have to agree with @Bill Brandt that with the increase in rates a lot of these banks are going to look to implement the due on sale clause. I can easily see banks hiring a few dozen people to run reports, pull title, and send out letters. They are going to be sitting on BILLIONS of dollars of loans at below market rates. Best case is they will write a new loan at the current rate.
One of Paces methods is to purchase the property with a lease option with the option price being the remaining loan balance. Since the title does not change there is no due on sale. As I mentioned there are several ways of doing this covered in the podcast so listen and learn.
Personally I think subject too is going to be a HUGE opportunity as some people who bought in the last year are going to need to sell but will not be able to get out without writing a check. This will be a key tool to help these folks get out of a house that is underwater but has a low interest loan in place.