Owner WANTS to offer owner-financing, but there's a loan in place...

2 Replies

I have clients who own a lot worth $200K, and they have a $120K balance on the mortgage. 

We got an offer from a buyer for $200K, with these terms:

$30K cash down payment

Interest only owner-financing at 5% for a 12 month term or when the building permit is ready to go, whichever is first.

The sellers could free up about $50K in cash from retirement accounts, etc., but with the buyer's $30K down that still leaves about $60K that they'd need to pay off their loan + Realtor fees, etc.

The sellers want to sell to this guy, and they're willing to make something work.

I have not yet been able to look at their existing loan, but I'd make the assumption there's a due on sale clause. It originated with a local lender, not sure it was sold off.

Should we start with the current lender, try to negotiate a transfer of the loan to the buyer?

Or should we be looking at an option, or a right of first refusal, or ???

How would the pros make this work?

You could just do it as a subject to deal.  Sell the property and leave the existing loan in place.  Yes, it violates the due on sale.  But if the payments continue to get made the lender probably won't call the loan.   I don't really like these because of the risk.  But in this case there's a short term plan to pay off the seller.

Shouldn't take a year to get a building permit.  I assume the buyer has some plan to get financing that's based on getting the permit.  If they do a subject to purchase, they would want to expedite this process just in case there is an issue with the existing lender.

An option also violates the due sale clause.

Assuming with this being  a land sale they are paying 10% commission then 20k out of the 30k is gone right off the bat.

The buyer would really need to put more down than the 30k. They want to put down only 15% which is small for land sales.

You could still wrap around the loan but disclosures would just have to be made about DOS clause so they all understand.

You can try to go to the bank for the loan assumption. Before you did that I would get the buyers personal financial statement, net worth, liquidity, other properties they own, track record, etc. to know odds of the bank approving them.

If the buyer is weak and only has the 30k down and no development track record the likelihood the bank would agree to an assumption is low. The bank might agree but also require the personal guarantee from the original borrower stays if there is one. Plenty of options but the key is to know the capability of the borrower who is wanting to take over the loan.

No legal advice.   

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