Seller financing with no equity and current mortgage

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Seller financing with no equity and current mortgage

Andrew Pappas
Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes

Hello, I have a specific question and haven't been able to find the answer.

I have a very motivated seller who owes about $126,000 on his house, which is also what it's worth.  He is willing to repair the property and sell it to me through a contract for deed for no money down.  His monthly principal and interest payments are $859, taxes are $700/year, and insurance $763/year.  I buy the house seller financed for the balance of the mortgage.  He continues to pay his mortgage, and I pay him the monthly principal and interest payment, which I will structure be the same amount he pays.  He is no longer burdened by the property. My questions are:

1. So the seller would hold legal title to the property, but I would take possession and full responsibility for the property, correct?  How do we avoid triggering the due on sale clause with the mortgage?  I would have to insure the property in my name, and the mortgage company would see this.

2.  Do I just pay the taxes directly to the county and insurance to the provider, instead of through escrow?  The seller would have to change his escrow payment to remove taxes and insurance, correct?

3.  For my exit strategy, I would seller finance it to an owner occupied buyer.  Can I set the interest rate so that I generate cash flow off the note after I pay the seller my payment, or does this violate Dodd-Frank?  And I won't be able to structure a balloon payment with an existing mortgage on the property, because the new buyer won't be able to refinance.

I see a potential for everyone to win here-the seller is relieved from this property, my new owner-buyer gets a nice property for below rent payments, and I get a monthly cash flow from the note.   Thanks for the advice

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y

@Andrew Pappas  the scenario you describe is a disaster waiting to happen.. owner carry low down transactions have a very high mortality rate.. ( default rate) buyers tend to think like renters.. and since they have no big down payment and no real credit at risk.. they will stop paying and NOW you have to foreclose to get them out then you have to evict if they won't leave after you foreclose.

So let me ask who makes the payments to your seller your buying from when you have no cash flow for a year or more.. ????  forget about due on sale that's the least of your problems in these scenarios.

if your seller cherishes there FIco score  and if they talked to an attorney.. they would be advised not to do this transaction..

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    CFDs aren't worth much more to you than an option to buy.

    If all else was good, I'd buy sub2 and make the payments directly. Seller can verify payments online every month.

    0Reply
  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    can I seller finance a property if I purchase it subject to? Does the loan go in my name at that point? I've got a call set up with my attorney tomorrow.  I'm counting on some good advice from him.  

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    Do you mean can you seller finance it to another purchaser?  Getting complicated.  

    No, the loan doesn't go into your name just the property.  You'd be buying subject to the existing mortgage.

    Yes, speak with a qualified attorney.  Good luck.

    1Reply
  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    Yes.  With his mortgage payment at $859, the rent in that market isn't high enough after all my operating expenses to produce a cash flow.  If I sold it seller financed my operating expenses would pretty much disappear and I could structure it so I get some cash flow.   People are likely willing to pay a bit more for a property if the down payment is low and monthly payment is still below market rents, correct?  I would  either do this or a lease option.  

    0Reply
  • Kevin Foster
    Vendor · Bonney Lake, WA · Member since 2016 · 48 posts · 12 votes
    9y

    Hello BP'ers

    @Andrew Pappas:  What you are looking at would be a WRAP (you buy w existing lien and resell under separate terms).  We do this for clients all the time. 

    Typically you would purchase the property from your seller under an agreement and sign a Prior Lien Addendum along w the servicing contract.  When you resell the property you would have an agreement w your buyer w Servicing Contract and Prior Lien Addendum.  In most cases we receive the payment from your buyer, take the payment for the first lien and pay it directly to the existing lien holder and distribute any remaining funds to you and/or your seller.

    As far as taxes and ins...the original mortgage holder probably has impounds set up for them included in the payment so not necessary to change that...you would have to investigate the original loan docs.

    Best to hire a RE attorney to make sure the paperwork has all the i's dotted and t's crossed.

    We are licensed to do business in NC...if you would like additional info please PM me.

    Hope that helps...good luck closing your deal!

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  • Sam Stout
    Flipper/Rehabber · Reno, NV · Member since 2016 · 235 posts · 35 votes
    9y

    @Kevin Foster is a WRAP still ok if the lender has a Due on Sale clause?  I am in the middle of a deal where I have 330k left on my loan and someone wants to buy for 650k with 0 down.  I am willing to finance @ 6% for 30 years but only if my lender wont ask for loan remainder if they find out.  Advice??  Thanks!

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  • Kevin Foster
    Vendor · Bonney Lake, WA · Member since 2016 · 48 posts · 12 votes
    9y

    @Sam Stout...Hi Sam.  There is no 'technical' reason a WRAP can't be used in that scenario...the mechanics of it are fine.  But yes...it might trigger the bank to exercise the clause.  I have no idea how some investors have been able to prevent the clause from triggering...maybe talked w the bank for a work around...or maybe due to no formal recording at county level.

    Sorry I was unable to give you better info...maybe some of the experienced investors like Bill Gulley,  Jay Hinrichs or another can share some insight?

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  • Sam Stout
    Flipper/Rehabber · Reno, NV · Member since 2016 · 235 posts · 35 votes
    9y

    Thanks for that.  The only way I've learned is that if you remove taxes and insurance from mortgage payments.  It also helps if the new trustee or whatever gets put on the insurance to not raise any red flags.

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  • Bob Derwin
    Investor · Mountaintop, PA · Member since 2013 · 110 posts · 57 votes
    9y

    If he owes 126k, and it's worth 126k,I'm not sure it's worth sure it's worth the effort ... where do you make your money?

    1Reply
  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    we do a contract for deed and sell it to someone else contract for deed with terms that provide us cash flow and a balloon payment in 3 years that will turn is a small profit.

    0Reply
  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    Yes that is a problem I am trying to work through.  I'm discussing it with my attorney, but I've heard of people putting the insurance in a trust in the name of the original owner, and making the new owner a trustee.  I would also explain to any buyer that I don't have title to the property, but it will be transferred when the contract is fulfilled by the balloon payment.  I'm not trying to screw anyone over.  This guy actually really needs to sell so I am trying to figure out a way that makes sense for me.  He's in a tough spot. 

    I have also explained the concern of the due on sale clause to the seller.  Surely there are people who have successfully sold a property with a mortgage through a contract for deed, or found a way to keep the bank from calling the loan due without assuming the mortgage.  Do I have any other options?  Any advice is appreciated.

    0Reply
  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y
    I think we are going to try for subject to, take title and the loan stays in the sellers name. Any suggestions for how we (or the seller) can convince the bank of this?
    0Reply
  • Odie Ayaga
    Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
    9y

    Strictly based on what I've read in situations such as what you're describing typically the HOPE is that the bank won't act on the due on sale clause so long as they're being paid but if you want to sleep comfortably at night the key is to have the funds to pay them off if they do. From what it sounds bank may be fickle and leave you alone or come after you unexpectedly depending on what may or may not best serve them at the time. Just my 2 cents. I'm sure there are more experienced investors here that can give you better info. I think Kevin tried to tag in @Jay Hinrichs and @Bill Gulley above. I'd take any info from either as worth its weight in gold

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Andrew Pappas  the scenario you describe is a disaster waiting to happen.. owner carry low down transactions have a very high mortality rate.. ( default rate) buyers tend to think like renters.. and since they have no big down payment and no real credit at risk.. they will stop paying and NOW you have to foreclose to get them out then you have to evict if they won't leave after you foreclose.

    So let me ask who makes the payments to your seller your buying from when you have no cash flow for a year or more.. ????  forget about due on sale that's the least of your problems in these scenarios.

    if your seller cherishes there FIco score  and if they talked to an attorney.. they would be advised not to do this transaction..

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    9y

    I agree with @Jay Hinrichs - way too much downside risk to all parties, for very little (or no) gain. 

    If there's no equity and no cash flow, there's no upside...why even get involved?

    If you truly want to help the seller, the best advice would probably be for him to sell the house on the retail market, break-even, and move on.

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  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    Yeah that all makes sense.  The only other option I see is to lease-option it and assign the lease option to someone else, and be out of the deal?  I explained this to the seller and he wasn't crazy about having another tenant in the property, so this probably won't happen.  I have told the seller just to put it on the market.  Thanks for all the input.  Definitely learned a lot without making any mistakes.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Andrew Pappas  antidotal:  I had this experience

    Guru try's to teach sandwhich lease options and how great they are.

    young group of investors here in pdx all charged up on Rich Dad Poor dad.. go out and talk about 35 homeowners into selling them their homes on contract with low to no down but full retail value.

    however they felt they could make about 200 a month delta by giving long term lease option to their buyers.. and if would work out the same in a wrap or CFD scenario

    Well it all goes good for a while why they are stacking this up.. they get to 4 or 5k a month positive and thinking they just invented the next greatest thing in RE investing.

    well after a year or so the first few start to leak oil  IE tenant buyer stops paying.. for some reason they recorded the lease options... I guess guru maybe thought this would help bolster credit for the anticipated refi or purchase..

    Well in this state a long term lease option that's recorded only way to get it off if you have a default is a sherrifs sale.. which cost 3 to 4k and takes almost a year..

    So now they have a few of these going on.. they are on the hook for the 1k payment.. a month and they need to put up the money to get the dead beat out..   Then another goes bad

    so it only took about 6 of these going bad to get them now in a very negative position.. and stop paying their sellers.. who then went BAT SH###T on them  filing complaints at the DA and AG.

    I ran into them and offered to help .. So I stepped in where I could but pretty much rescued the whole thing and kept them out of serious trouble a few of the props did have good equity so I made it worth my while but I could cash them out.

    This group had talent they became my door knocking team for about 4 years and made me millions  LOL.. and a nice living for themselves as well.

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  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    Wow..I thought Rich Dad was a pretty reputable company, or did these investors just sell to bad tenant-buyers?  Are you against lease-options?  What about assigning lease options for a small fee so you are out of the deal?  

    This could be an issue with any sort of seller financing though, right? New buyer defaults, and eventually the investor can't/doesn't pay the monthly payment to the note holder.  I see how this is a big problem if there is an existing mortgage on the property, but if the seller owns free and clear, I would think buying seller financed and re-selling seller financed could work fine.

    0Reply
  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    Its worth $126K and you're considering buying it for $126K.... NOT A DEAL!!  You would be asking for a disaster.

    I keep seeing all these posts where people think they have a good deal because someone is willing to carry the note...  Either the numbers make sense or they don't (PERIOD).  In this case, the numbers do not make sense.  Don't walk, but RUN AWAY from this deal.  As Mr Wonderful from Shark Tank would say..."I forbid you from investing in this deal".

    If you had the $126K cash, would you buy this deal?  Probably not.

    If the numbers were great, say he only owed $70K, sure you could probably make this deal work and worth the risk.  But not this deal at those numbers.

    I'm going to post this one more time:  JUST BECAUSE SOMEONE IS WILLING TO CARRY THE NOTE, DOES NOT MAKE IT A GOOD DEAL!!

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Jeff Filali  its the allure of getting into real estate with little or no down.. investors get blinded by that thought alone...

    however this type of investing frankly is really only suited for companies that are very strong financially and can take care of negative cash flow while working with a dead beat tenant..

    @Andrew Pappas  of your you can assign these deals but its the greater fool theory.. your just finding someone who is not very swift when it comes to real estate and simply does not know the risks.

    I have bought hundreds of sub too's in my career but as Jeff stated above I never touched one that did not have significant equity.. you can't believe even with significant equity stuff happens.. with no equity its a loser day one..

    And I know the sentiment some investors have which is they could care less if the deal failed they got their dough they are fine.. but the poor seller is royally screwed  in a default in these scenarios.

    Switch places would you want to deed your property away and have someone default and your still on the mortgage and this person won't answer the phone or correspond.. its a very helpless situation you put the sellers in ... And of course BP is for learning so now your learning why these are no good   LOL...

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  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y

    Yeah we are not going to get involved. I thought I should reach out and see if there is a sensible way to construct a deal, but it appears not.  Thanks for the advice.  

    1Reply
  • Andrew Pappas
    OP
    Investor · Trumbull, CT · Member since 2017 · 59 posts · 9 votes
    9y
    Originally posted by @Jeff Filali:

    Its worth $126K and you're considering buying it for $126K.... NOT A DEAL!!  You would be asking for a disaster.

    I keep seeing all these posts where people think they have a good deal because someone is willing to carry the note...  Either the numbers make sense or they don't (PERIOD).  In this case, the numbers do not make sense.  Don't walk, but RUN AWAY from this deal.  As Mr Wonderful from Shark Tank would say..."I forbid you from investing in this deal".

    If you had the $126K cash, would you buy this deal?  Probably not.

    If the numbers were great, say he only owed $70K, sure you could probably make this deal work and worth the risk.  But not this deal at those numbers.

    I'm going to post this one more time:  JUST BECAUSE SOMEONE IS WILLING TO CARRY THE NOTE, DOES NOT MAKE IT A GOOD DEAL!!

     I didn't post advertising that I have a good deal..I posted to see if those more knowledgeable than me knew of a way to create a win-win in this situation.  It's clearly not in anyone's interest, so I will not be getting involved.  

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  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Andrew Pappas If the numbers made sense, there's ways to make a deal like this one work.  But only if the numbers are worth the risk.  

    I recently did a similar deal, but the payoff amount was 60% of the value of the property and I would only need 90-120 days to pay it off in full because I had too much tied up in other deals at the time. But similar circumstances where the sellers needed out and were willing to sell for payoff.  So, I went with the sellers and met with their bank and discussed our intentions making sure they would be fine with the arrangement.  I paid the next 4 months payments up front directly to the bank including principal, interest, and escrow for taxes & insurance.  Then we did a contract stating everything and the payoff balance would be due within 120 days.  The bank was fine with this and so was the sellers. Both signed off on it.

     I turned around and sold the property less then 30 days later to another buyer for full value and carried the note for them and I later paid it off in full 90 days later.   Win, win, win, win for all parties involved.  The bank got paid and didn't have to foreclose on the original owners, the owners got rid of their bad situation without ending up with a foreclosure on their credit, the new buyers got a nice house that they would have had to wait a few years to repair their credit issues after a divorce, and I made a nice return on my investment.

    So, yes these deals can be made, but the numbers & risks have to make sense to all parties involved and I'd never recommend this if you don't have funds available or had I not known  for sure that I had the funds coming in to cover the deal and carry the holding costs if it stayed empty. 

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    9y

    Other than Jay and the comments by Mr. Copeland, this topic is way above the pay grade for those who think they know what they are doing, you cannot assign a seller financed note without consent of the note holder,  you cannot put n owner occupant in the house like a lease to own without compliance with Dodd-Frank, as applicable, a contract for deed has the same issue today and many more, any lease option greater than 12 months will be determined to be a sale without special provisions being taken for the IRS......and you still have predatory lending issues regardless of how much you may "help" someone while taking their property, even if they know they are losing. 

    Good to be back, I think, same ole' same ole stuff, lol     :)  

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  • Michael Evans
    Real Estate Consultant · Lancaster, CA · Member since 2014 · 423 posts · 223 votes
    9y

    I don't recommend this specific deal because the numbers don't make sense.  But the way you can make this work without invoking the due upon sale clause is to put the property into a land trust for "estate planning" purposes.  Have the seller give you limited Power of Attorney specifically for this property so that you can "manage the estate planning".  You send the limited power of attorney paperwork to the loan servicing company, the insurance company and the County informing them that all communication for this property will go through you as the attorney in fact for the land trust (you need to be name the trustee of the land trust).  After you establish the original land trust, you have the owners (beneficiaries) assign the beneficial interests to you (the buyer who also happens to be the trustee).  The land trust doesn't get filed with anyone (not even the government) and you can always show the original if someone contests the validity of the trust to show the owners as the beneficiaries, but no one needs to know they have assigned the beneficial interests.

    So legally, the lender will never know that ownership of the property (which lies now with the land trust) has changed hands.  Only a court ruling can compel the trustee to divulge the identities of the beneficiaries.  Hope this helps.

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