Seller financing with a bank loan in place

11 Replies

I have found an investor who would like to sell a bundle of properties (3 SFH) in an area that I am very comfortable with. He has them priced below appraised value but the appraisal was done in 2009. He is willing to do seller financing but he has a traditional mortgage in place. We are meeting this week and I have a call into a lawyer. I have been reading like crazy about subject to and lease options. I want to show up with knowledge and this is the first seller financing deal I've ever negotiated.

Because there is a loan in place, I'm worried about a due on sale clause.  

What I know so far: 

3 houses - asking price $327,000 - current monthly rent $2600

Don't know any details of current mortgage or amount of equity

From our side:

We'd be able to put down 10,000 or 15,000 -(some of which would be borrowed money from our HELOC)

We'd love to do a 15 year seller financing and own outright at that point


How would you structure the deal?

What kind of interest should we be paying?

How does the 5% over market with no interest at 180 payments type of deal work? (read about it on BP)

Could we set up a lease option that allowed for some of the payment to go to principal in order to drop the purchase price and then finance out later on? 

Looking forward to your ideas!

Hi @Carrie Hallensleben

You can 

-Buy on 

  • sub2 plus note + mortgage or
  • a wrap or
  • an installment land contract.

-Lease on a 

  • Sandwich lease option, sub lease and sub option

-I like no interest on note but there is imputed interest from the IRS to the owner

1. Analyze 

Market rent - payment to owner  = your cash flow profit per month;

must pay all costs (taxes, insurance, maintenance, vacancy) with some profit

2. I would "buy and hold" if I got a low enough outgoing costs, wait for free and clear of debt in 15 - 20 yrs

3. Offer their price and your terms (low PITI Payment)

4. Get new appraisals on FMV (sale price) and FMR (market rent). You need them in cash IRS audits. See

Good luck!

We recently purchased an 8 house deal from a retiring investor. He had mortgages on all 8 houses. We were able to negotiate a discount on the properties. But we couldn't put together a 20% down payment to satisfy a bank. So we gave the seller a 5% down payment and he agreed to carry notes on all the properties. Now we have the houses which are all rented. We pay him a flat 6% on 20 yr amortization. His notes are less than that, some as low as 3.75% with 30 yr amortization. He pays his mortgages each month and takes home the spread. If done right, wraps can be a win win.

@Bill Hamilton 

Thank you for the advice and we definitely will get that before agreeing to terms. 

@Jonathan Towell

Thank you for sharing your insight. I wonder if you could elaborate a little on the 6% seller financing deal. Did the deed get switched into your name? Were you worried about the due on sale clause? If the seller kept his mortgage and is paying it after from your payment to him, is he still paying the escrow (taxes/insur)? Would that mean the insurance is in his name? Also how do you insure he makes all the payments and you don't go into foreclosure. Did you have an attorney write up the contracts between you and the seller? Thank you very much for the feedback! I appreciate it!

At first glance, you are over-paying.  Never overpay!  Rents in general need to be 1% of purchase price, especially in KC.  Price closer to $260k would pencil better for you, of course @Carrie Hallensleben !

Be a little extra leary dealing with another investor.  You are buying their value-add.  Why are they selling?

@Steve Vaughan

Thank you. We drove by and it looks like they are in need of some expensive exterior work ie paint and roof. We will get them appraised and inspect to make sure it is a deal that benefits all of us if we get that far. We haven't yet met with the seller in person. 

You're welcome @Carrie Hallensleben .  Chances are the interiors are rough as well.  The 1% rule I was referring to is for a performing asset that doesn't require extensive repairs/maintenance.  Those need to be accounted for as well, obviously.

@Carrie Hallensleben

The deed was switched to our name. The title company had to call a few different attorneys to find one that would write up the correct paperwork. I wish I had more information about how that worked, but I don't because we kind of just delegated it to our title company.

The way we read most "due on sale" clauses is that the lender has the option to call the note. In our experience, lenders won't call the note if they are receiving payments on time. That said we had investors on standby in case the note was called.

The seller called his lender and asked them to drop taxes and insurance from escrow. We then purchased insurance and named the seller as beneficiary.

Every month the seller sends us confirmation that he has made his payments.

We took time to build a relationship with this seller. Everything is in writing, but this maneuver does involve some detailed mechanics which makes the relationship important. Also, we arranged this as a short term deal with the goal of exiting via refinance after 3-12 months. I might think longer and harder about doing this kind of deal with longer terms.

@Carrie Hallensleben

If you want to close quickly and with the greatest profit, here's how I'd structure them:

No money down contract for deed

Interest only NOO with seller leaseback until you've acquired a tenant or assignee on the CFD so you don't eat payments

30 year term or the longest balloon you can get with an appraisal clause

Price is immaterial. 

I don't care if it's $300k or $3MM.

You want up front cash via down payments or option fees and cash flow. You can't control valuation so negotiate what you can but don't let price be a deal killer. We want payment and terms so we can make money today and in perpetuity. If we can get backend, great, but there's never any guarantee of that when you're in buy and hold mode. 

You don't need to waste money on appraisals (they aren't an insurance policy of a future value when you're ready to refi) and you don't need to close with an attorney or transfer deed (the attorney is only going to provide signatory and disbursement services which you can do yourself).

The seller can keep the deed as a security interest against default. You can record a memorandum to secure your place on the title. The only value of a deed with a lien against it is that it enables you to not make payments during a foreclosure process so you can stay in a property longer than you otherwise would be able to when you default. Other than that, the only thing you can do with it is pay it off and if you can pay it off, you can force production of the deed at will when you refinance. 

Likewise, title is immaterial at this point because the contract requires the seller to provide clear and marketable title upon payoff and you can't stop liens or clouds from appearing at any point before you refinance even if you have the deed. An owner's title policy is only going to cover you for actual documented loss, maybe. It doesn't cover the amount of the entire loan balance. 

If you're concerned about deferred maintenance, put a clause in the contract that the seller is responsible for deferred maintenance through X period for a ceiling of X amount of dollars and then get a home warranty. 

Due on sale is an urban myth where you'll be lucky to find anyone who has ever had a note accelerated if the payments were current. Banks are in the interest collection business, not the note payoff business. I've never had any note accelerated for DOS on any deal. Not that it couldn't happen, but every homeowner violates a bazillion other provisions in every note the minute they bring hazardous substances into a home like gasoline, oil, Drano, alcohol, Clorox, etc., and you never see a bank accelerate a note for that.

Long story short, you could have this deal wrapped up today without any additional expense and be cash flowing later this week.