Better to use Owner Financing or Subject to?

Question

I have a property I want to buy from a couple getting a divorce, but it has an existing mortgage with a balance of $150,000. Asking Price is $180,000 with $20,000 down payment. He's okay with seller financing, but is seller financing possible with an existing mortgage? Does the seller hold the mortgage and I just make payments to him? Or would I have to do subject to? Should I consult an attorney to get everything in order or just go through title company? My first deal so I'm lost on what I need to do. I have the down payment ready to go, I just don't really know where to even start paperwork-wise. Thanks for your time everyone.

Steve Vaughan · Answer

I wouldn't do either if they're both on the title and mortgage.

They will most likely need to sell and split it or the one that keeps the house will need to refinance to satisfy the divorce decree.

A wrap or sub2 pre-divorce will be a mess.

Account Closed · Answer

The first question to ask is "how is title currently held"? If title is in his name only and he has a prenuptial agreement, then you take one course of action and perhaps succeed.

If title is in both names, you either have to get both parties agreements and signatures and cash them out in escrow. It has to be a clean break.

Or if you want to tie up your time until their divorce is finalized and take a whopper of a chance, you proceed with owner financing or subject to or land contract or whatever pixie dust option you choose, only to have it fall apart once attorneys get involved.

Properties pre-divorce are pushing rope uphill. Can you get it done? Maybe, but is it worth it? Rarely.

Max Ferguson · Answer

Yeah, huge mess to keep it in their name. If you plan to rent, or know it would command good rents, you could possibly do a DSCR loan. Another avenue would be to bring in a cosigner and offer them a stake in equity, return on down payment help, etc... To get your through closing. Good luck, keep us updated!

Sanat Bhandari · Answer

@Cameron Salmon I agree with Steve's comment. Make sure they sign the decree before you proceed

Seller financing with pre-existing mortgage is what's called a hybrid subto by the Morby team. Seller holds the mortgage in his name but get a mortgage servicing company to make sure that payments are made to the first lien holder on time instead of relying on the seller while you make direct payments to the seller for his portion of the equity. Essentially, you have two finance payments per billing cycle on the property

YES, consult with an attorney and make sure you have all your ducks in a row before pulling the trigger on a relatively complicated transaction such as this. There's plenty of ways to land yourself in hot water with this strategy (ask the n number of people that have faced lawsuits due to deficiencies in subto agreements + communication)

Also, if this is your first deal, it wouldn't be a bad idea to get due-on-sale insurance to make sure you're covered on all fronts. Remember, you have a fiduciary duty towards the seller and his credit so protect him (and yourself) at all costs

Reid Chauvin · Answer

@Cameron Salmon - may I ask why you are not considering a conventional or non-qm long-term loan? Much less complicated than this seller-financing scenario and likely less costly than hard money loan. You can still refinance if rates were to decrease materially after you closed on the loan. You would need to put at least $27k (15%) down plus closing costs and prepaids, so I guess that's the drawback if you don't have enough funds.

Tom Gimer · Answer

@Sanat Bhandari Due on sale insurance... lol

Eliott Elias · Answer

If you are seller financing you are wrapping the mortgage. You will use a service to make sure funds are being allocated correctly. Work with a title company that has experience in this, I would recommend Fidelity National Title.

Jay Thomas · Answer

When it comes to Real Estate and divorce, it can be a tricky process that requires careful consideration. In most cases, couples will need to sell and split the property, or the one keeping the house will need to refinance in order to satisfy the divorce decree. If a wrap or sub2 pre-divorce was arranged, then this could become an even messier situation. It's important for anyone going through a divorce involving Real Estate to carefully consider their options before proceeding.

Nicholas L. · Answer

just saw you say ARV is probably 250.  doesn't seem like a deal at 180 if it needs even a moderate rehab.  lots of closing costs on buying, refi, selling, etc.  why start with something with all these strings attached?

Nicholas L. · Answer

@Cameron Salmon

can we back up from all this complexity and just see if this is even a good deal?

can you post details?  what are your plans for it?  what is ARV?

Better to use Owner Financing or Subject to?

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