😵‍💫HELP!!😵‍💫w/ Seller financed "agreement for sale/ contract for deed"

Erik Browning

Lender · CO CA TX WA ID OR · Member since 2020 · 419 posts · 542 votes

3y

@Wyatt Postal

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

3y

Brother is going to have problem with his FHA loan in this deal. It's not arm's length.

When will you have title in your name? Do you have your refinance in place approved or are you selling pieces to get there? All are free and clear?

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Tom GimerBusiness Member

DMV · Member since 2017 · 3k+ posts · 3k+ votes

3y

Contract for deed = Land installment contract = Land contract

Seller: pro… installment sale; con… limited forfeiture rights so likely has to foreclose in event of default.

Buyer: Pros… deferred closing costs, little to no money down; con… the seller’s financial issues, if any, can become the buyer’s as the seller is still owner of record.

Contract purchaser is equitable owner and can refinance (or resell) to pay off the seller.

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Johnny McKeonPro Member

OP

Rental Property Investor · Mesa, AZ · Member since 2016 · 103 posts · 72 votes

3y

Quote from @Caroline Gerardo:

Brother is going to have problem with his FHA loan in this deal. It's not arm's length.

When will you have title in your name? Do you have your refinance in place approved or are you selling pieces to get there? All are free and clear?

I"m meeting with the seller today for lunch so hopefully we will sign the contracts today or meet again next week if there's more to negotiate . no refinance in place yet but i've talked with my mortgage broker about different loan products and where rates are at. this is a value add deal and and the units need remodeling to achieve higher rents and if I lock the seller financing in at 5.5% interest only i don't think i want to refinance yet in today's current "high" interest rate environment.

we are going to set this deal up that out of the five 4plex's I will buy 4 of the buildings with seller financing and then for my brother I will represent him as his realtor and he will purchase directly from the seller with FHA 3.5% down so that it will be an arms length transaction.

i don't remember the exact number but yes some of his buildings are owned free and clear and i think 1 building or 2 might have 100k or 200k mortgage. he bought these buildings at the perfect time in 2009 all time low price when prices crash during the great recession. when my brother buys the 1 building he wants to use the $600k and my down payment of $300k to pay off what he owes and use the rest to go to Florida and focus and his new beach property and donate and help with his church

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Johnny McKeonPro Member

OP

Rental Property Investor · Mesa, AZ · Member since 2016 · 103 posts · 72 votes

3y

Quote from @Tom Gimer:

Contract for deed = Land installment contract = Land contract

Seller: pro… installment sale; con… limited forfeiture rights so likely has to foreclose in event of default.

Buyer: Pros… deferred closing costs, little to no money down; con… the seller’s financial issues, if any, can become the buyer’s as the seller is still owner of record.

Contract purchaser is equitable owner and can refinance (or resell) to pay off the seller.

Thanks Tom for listing out the pros and cons! that helps

so even if this deal is an "agreement for sale" and "contract for deed" the seller would still have to go through the foreclosure process?

since i wouldn't actually own the property would the seller have to still take care of the property taxes and the property insurance?

and can the seller still take out new debt against the property?

thank you so much for helping, Tom!!

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Tom GimerBusiness Member

DMV · Member since 2017 · 3k+ posts · 3k+ votes

3y

@Johnny McKeon As a buyer you actually prefer laws requiring the seller to foreclose rather than simply retaking possession.

The land contract spells out the terms regarding insurance and taxes... these would typically be the buyer's responsibility through payment of PITI to the seller, who would then turn around and make those payments.

Local law would govern the ability of a seller to take out debt... for example the allowable mortgage balance might be capped at the amount due from the buyer. However, any title search would disclose the existence of the land contract and smart lenders would require the consent of the contract purchaser in connection with the proposed transaction.

Good luck.

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

3y

Unless you solely own on title real estate you cannot refinance, it's considered a purchase loan if you want to get a loan.

Seller who remains ownership/title can refinance with cash out. If seller had to file BK the properties go into the BK. Any lawsuit on seller can get recorded on title as lis pendens and eventually be a judgement.

No down payment and 5.5 rate are great plus(es). However, how will you know if he pays off the existing mortgages? You can't get title insurance to cover you in the event of default/his probate if he dies/liens/...

Who holds the wet signed contract? Is it recordable?

You need to vet the seller. Are you willing to marry him? ( I use this term often to demonstrate the level of trust you need.)

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

3y

You'll basically just have an option to buy. Liens can attach. Tough to refi what you don't own. I certainly wouldn't improve his property for him.

You're credentials and DP should be enough security. Pass if not a note and d of t.

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Account Closed

Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

3y

Quote from @Johnny McKeon:

Hi biggerpockets 👋

I'm working with an off Market seller who has five 4-plex's (20 units) in Mesa Arizona.

Thank you so much to everybody for your help! I appreciate any wisdom or guidance that you can share

It’s been a long day and I don’t want to have to get up to go get my abacus.

Tell me again how they wind up with the amount they need?

Your comment “they said they needed approximately $900,000 in their pocket to renovate their Florida property.”

He must be a very lucky guy to sell that much real estate and not have to pay taxes.

(Brother) “He's pre-approved with FHA 3.5% down at $600k”

“but he agreed to sell one 4-plex to my brother for $600k but the $120,000 difference will be tacked on to my seller financed loan amount”

Who would own "what", if some of the debt is transferring from your brother's purchase to you? And, would you disclose that to the FHA? (I think you'd need to disclose.)

Are you cross collateralizing?

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Tom GimerBusiness Member

DMV · Member since 2017 · 3k+ posts · 3k+ votes

3y

@Caroline Gerardo @Steve Vaughan Not sure if they do anymore but I have certainly seen lenders treat property that is occupied by the borrower as a primary residence under a land installment contract OR a lease option as a refinance... complete with 3 day rescission period.

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Peter Walther

Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes

3y

I suggest you first read Arizona Revised Statutes (ARS) Title 33, Chapter 6, Article 3; 33-742; 33-743; 33-744 and 33-745, then discuss your plans with a good AZ real estate attorney.

I also suggest you discuss your plans with a good accountant to be sure you understand how your income and expenses will be accounted for.

Arizona Revised Statutes (azleg.gov)

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Peter Walther

Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes

3y

Quote from @Steve Vaughan:

You'll basically just have an option to buy. Liens can attach. Tough to refi what you don't own. I certainly wouldn't improve his property for him.

You're credentials and DP should be enough security. Pass if not a note and d of t.

I believe in most states an agreement for deed creates an equitable interest in the land where an option to buy may create a contract interest.

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Peter Walther

Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes

3y

If you elect to move forward with the deal, I suggest you obtain and read a title commitment and policy insuring your equitable interest in the property. The former will disclose any interests the insurer believes need to be disposed of before closing and matters which will appear as exceptions in the policy. The latter will disclose matters the insurer will not provide coverage for.

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

3y

@Tom Gimer not today, conventional and FHA will not

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Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

Quote from @Johnny McKeon:

Hi biggerpockets 👋

I'm working with an off Market seller who has five 4-plex's (20 units) in Mesa Arizona.

Him and his wife are selling off all their properties except for a beach front property that they purchased in Madera beach Florida. They are selling everything because they are in their 60s and don't want to be in the rental business anymore and don't want their rental properties anymore and don't want them back and they want to move to their new property in Florida to redevelop it and they said they needed approximately $900,000 in their pocket to renovate their Florida property.

For the five 4-plex's they want to seller finance them. The buildings need interior renovations and the seller has approximately 6 empty units out of 20 and the rents are all below Market so this would be a value add project

Originally, they wanted to seller Finance doing a deed of trust and promissory note but now they want to seller finance doing an "agreement for sale" or "contract for deed"

because they said they are worried about foreclosure. they don't want to go through a Lengthy foreclosure process and they just want to get their properties back easily if i was to default.

They said part of selling to me is though they don't want their properties back and they just want to be done with them

I currently on 10 properties with 45 multi-family units in the Phoenix Arizona Metro Market and I showed them my bank account balance and I've showed them my credit score and that I've never missed a payment on any of my mortgages including the anyone deal that I did sell her financing and I paid back that seller. And the current seller finance deal that I have that I make payments on time every month

I am a licensed realtor here in the Phoenix Metro and I also am helping my 20yr old brother find a 4plex to house hack so he can follow in my footsteps. He's pre-approved with FHA 3.5% down at $600k so a little less than what some of the 4-plex's are selling for in the valley.

The seller wants $720k for all 5 buildings but he agreed to sell one 4-plex to my brother for $600k but the $120,000 difference will be tacked on to my seller financed loan amount

Here's the seller financed purchase price when i buy the 4 buildings and my brother Purchases 1 building with FHA. The seller is not paying any commissions or any concessions

Purchase price: $3,000,000 (4 buildings at $750k per)

Down payment: 10% = $300,000

Loan amount: = 2,700,000

Interest rate: 5.5% interest only

monthly payment: $12,375 (due to sellers every month)

My main question and concern is does anybody have any familiarity with doing

An "agreement for sale" or "contract for deed" that they can shed light on ?

I have done two seller financed deals where we just did a deed of trust and promissory note and I have some other properties that I just purchased out right using conventional loans, DSCR loans, VA and FHA for my house hacks

What are the pros and cons as a seller wanting to sell as an agreement for sale?

And what are the pros and cons as a buyer wanting to buy as an agreement for sale?

How would this affect me remodeling the properties, getting a HELOC or doing a Cash out refinance later? From what I was reading it says I wouldn't actually own the property.

would you personally want to do an agreement for sale? Or Would you just explain better how a deed of trust and promissory note work?

Thank you so much to everybody for your help! I appreciate any wisdom or guidance that you can share

we have bought and sold a lot of land contracts. in arizona its a non judicial foreclosure state and is a very fast foreclosure state. I would push back and do a traditional mortgage and note.

1. Cons are you will have trouble refinancing or selling the asset. As a buyer really no pros. What if they took at financing on the property and yuo were unaware.

2. You could not get a HELOC as you do not own the assets. Title stays in their name.

3. If they need $900k how are they getting it if you are only doing $300k down?

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

3y

Quote from @Peter Walther:

Quote from @Steve Vaughan:

You'll basically just have an option to buy. Liens can attach. Tough to refi what you don't own. I certainly wouldn't improve his property for him.

You're credentials and DP should be enough security. Pass if not a note and d of t.

I believe in most states an agreement for deed creates an equitable interest in the land where an option to buy may create a contract interest.

I was just outlining the worst-case scenario. All so the (probably uninformed) Seller can have a little more sense of security conveying via LC / CFD. OP needs to fight for a note and DofT.

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Carrie Matuga

Lender · Riverside, CA · Member since 2017 · 248 posts · 98 votes

3y

Talk to Andrew McGuire. He is an AZ agent out of Gilbert AZ and he specializes in these kinds of hybrid seller financing/sub-to deals.

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Account Closed

Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

3y

Quote from @Tom Gimer:

@Caroline Gerardo @Steve Vaughan Not sure if they do anymore but I have certainly seen lenders treat property that is occupied by the borrower as a primary residence under a land installment contract OR a lease option as a refinance... complete with 3 day rescission period.

@Tom Gimer: (Not trying to hijack the thread but)

This just happened

In a Probate sale, 3 heirs: John, Bob, Jill

Jill is appointed Personal Rep (PR) No attorney involved.

Jill notifies John but intentionally doesn’t notify Bob. John keeps quiet.

Jill sells the property to a wholesaler who is in on the scheme, quickly for cash, at considerably below fair market value. (speed of sale )

The Title & Escrow company was informed by an outside party, of this intentional omission but closes the sale of the property anyway to an innocent third party.

Jill & John split the proceeds. (obvious honesty and probate problems & Jill omitted Bob on all probate & closing forms, but that isn’t the question here,)

The paperwork from the probate court says Jill is the PR and has properly filled out the Probate paperwork.

1. Is it standard procedure for a Title company to allow a closing when they know an heir has been intentionally omitted from probate?

2. When Bob finds out he was scammed and wants his piece of the pie, the pie of which was diminished by a “sweet deal” transaction, does he have recourse with the Title company?

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

3y

What did the will say that Jill filed in the court? Was there fraud in her probate filing? She filed under penalty of perjury. Go get copy of what she filed, will likely omits Bob. Title company has access to court filings but they don't know what Mom's will said or what she intended.

What or how was provided to Title Officer to prove the cloud that Bob is an heir? They needed to show another will and Mom was competent to change it.

Without seeing what Jill did or what the unknown person sent to whom my guess is Bob has to sue Jill and John. Bob will need the last legal will and probably one with wet signatures to show the court.

My guess is Bob cannot win against the title company in court. If he wins against Jill in whatever county/state court he could overturn the sale and get damages, Jill might also get jail time if she defrauded everyone. (25 years in some states) @Account Closed

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Tom GimerBusiness Member

DMV · Member since 2017 · 3k+ posts · 3k+ votes

3y

@Account Closed If there are "heirs", there is no will to probate. How do you know who the true heirs are? What are Jill, John and Bob... 3 children of a deceased parent?

The title company should be able to rely upon official probate paperwork, but once they are given notice of a potentially undisclosed heir, that may create a legal duty to inquire further and perhaps a duty to the undisclosed heir. If that is the case Bob would need to prove his case under some negligence theory (or quasi-negligence theory which allows purely economic damages) or some consumer protection statute in X state.

So, IMO it's possible but not probable.

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Peter Walther

Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes

3y

Quote from @Steve Vaughan:

Quote from @Peter Walther:

Quote from @Steve Vaughan:

You'll basically just have an option to buy. Liens can attach. Tough to refi what you don't own. I certainly wouldn't improve his property for him.

You're credentials and DP should be enough security. Pass if not a note and d of t.

I believe in most states an agreement for deed creates an equitable interest in the land where an option to buy may create a contract interest.

I was just outlining the worst-case scenario. All so the (probably uninformed) Seller can have a little more sense of security conveying via LC / CFD. OP needs to fight for a note and DofT.

I have been called pedantic; I like to think I'm just trying to be clear.

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Peter Walther

Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes

3y

Quote from @Chris Seveney: