Seller Financing Warnings!

24 Replies

I have found myself negotiating a seller financing deal. The property is in a great rental location however needs a fair amount of repairs, somewhere in the ballpark of $30-$40k. It is not currently live in ready and the seller has expressed interest in seller financing largely do to the fact that the property may be difficult for her to sell on the market. My concerns and thoughts are towards putting money into a property that is acquired through creative financing and not through a conventional loan. 

I guess it depends on how the deal is outlined in the contract but is there any possibility / has anyone experienced putting their own money into a property to only have the seller end up backing out of the deal or defaulting on the financed portion to reclaim their now newly fixed up property.

I guess this is where an attorney comes in and a title transfer off the bat would be advised. Any shared learning experiences would be greatly appreciated!


@Kody Veit - this is a perfect Lease Option solution with Work for Equity. You take over the payments and then find a lease with the option to buy at another payment level. The Work For Equity allows the new prospective owner to lower the purchase price by doing the work. You are there to help facilitate the deal, make sure the work gets done and keep the payments going to the seller. 

Best part of the Lease Option is that if one person backs out, you get another to put down money and do the same program. Its perfect for properties not easy to sell where the owner wants to be done, but cannot afford to fix up and sell. You can always get a rehab loan or note against the house, if the seller wants a quick sale, but negotiate it as if you were buying with you own money. 

Yes, get a real estate attorney involved, but learn about Lease Options as well. Its a powerful strategy to own properties. 

You want a Purchase, since you are going to sink $30-40k into it. And yes a straight purchase where title transfers and the seller gets a note and mtg. Not anything where title stays in their name.

owner financing is not much different then bank financing The property would be transferred to you through a deed and the note or mortgage would be recorded The seller has more to worry about, getting paid,then you would As long as the transfer is done through title and escrow with insurance it's smooth sailing

With $30,000 - $40,000 in repairs needed, I would not do anything except a standard mortgage.  Do not even consider a lease option or anything like that.

Is the property owned free and clear?? That could change a lot of things and it definitely should be a purchase so title transfers into your name with that much work needed to be done. Also think about how long it will take you to get that 30K back in renting the property. I just did a seller finance deal with a guy with principal only payments of a $1000 a month to him and balloon payment of remaining balance due in 12 months. Saved a lot on no points/fees/interest only payments and the apx 30K profit from this house I will have ready for a possible rental with not as many repairs. Don’t know your whole scenario and of course more variables involved but definitely should be a purchase where title transfers. Seller finance deals are way better than bank loans in my opinion.

@Jack Bobeck as @Mike Flora has provoked, I should have mentioned the property is free and clear. My concern with a lease option would be at the end of the term if I go to buy and she decides not to bc she now has a rehabbed property I could find myself in a legal battle I dont want to be in. Or if I am reading that clearly what you are referring to is a middle man type deal where I then try to sell it to another buyer through a lease option as well. Again though my concern is with the intentions of the current owner. 

@Mike Flora Yes it is owned free and clear. I believe I could get conservatively $2,500/mo in rent. After all expenses including PMI, I would estimate I am left with somewhere around 750/mo. Using that to pay off the 30k in repairs I'd be looking at a little over 3 years. Bc of the repairs I am in a position to get a fairly marginal price on the property as compared to repaired market value, which is another incentive to make this work. Perhaps I can negotiate a similar deal with no interest, will have to run the numbers to see what makes sense.

I appreciate all of your responses and seems that it is wise to ensure Title transfer before anything is done. My gut feeling initially was in line with that as well, but as always I appreciate the insight. 

No down payment is legally required, but most sellers want, and should get, something down.  She'll likely need at least some relocation money, at a minimum.

If the seller wants to sell the property via seller financing at the ARV, would it be wise to give them their price in accordance with your terms (rate, amortization, etc.)??

@Keith Johnson I can speak for myself and this particular property. I am not looking to buy at the ARV of the home when it is fixed up. The deal here comes from buying a property that needs repair and provided the aid to get the repair done. The seller is an older lady who has tried to hire contractors herself who have unfortunately taken advantage of her and so she fired them and left the house un-renovated to cut her losses. So I am buying at a lower value than ARV to help her fix the house and sell it (to me). She is limited with other options at the moment. The terms are going to be negotiated by both parties to which we both agree.

@Kody Veit Its so nice to see people throwing around 30-40k like its iced tea on a hot south florida day. If you have an extra 30-40k laying around, I'll get in line........

So to recap, owner owns free and clear, it needs 30-40k of repairs. Setup terms to get a 10, 15, 20 year balloon with the current owner. Turn around and offer it as a lease option and get someone else to do the work, as equity to own the property. Offer it out to someone who cannot get a mortgage, ask for 5-10k down, to get someone serious. Try this for a few months. Get 90 days before the 1st payment to the current owner. Ask, ask, ask.

If its as tight a real estate market there as it is here, people will have the cash to spend on the house and you get to get it off your books in any term of say 5 years, where you give them a balloon where they have to get a new mortgage or new terms. Work with a local real estate attorney and get some documents that can lock down your new lease option candidate. Pay off the original note at the time of the "double" close and move on to the next one. 

I hate to see good people throw 30-40k at a property when they could have used Other People's Money to get to a better result. The longer you are in real estate, you will appreciate holding onto your cash, with both hands. 

@Jack Bobeck I think I love what you are saying but let me see if I understand what your saying. 

Lease option the house with the current owner with a term of 10-20 years. Then find someone else to lease option who has the capital to repair the house. I would be making the difference btw what my lease payment is with the existing owner and what my lease option is. Sounds like a master lease option? You also advise a 90 day delay on the first payment to the current owner. 

B/c rent is so expensive in this area I had the intentions of possible borrowing the money for the repairs and living in the property myself all the while renting out the other spaces so that I could essentially house hack and eliminate my living expenses to help save. I have the price in mind that I could spend to make some cash flow (after all expenses) in the event I move out and the property is fully rented. Another exit strategy would be to sell the property, which would turn a profit at this purchase price. 

Thank you for your input, it has given me a lot to think about. 

@Kody Veit If you are in the house, hacking the deal on your own, this is your deal and you have no time or energy for anything else coming at you. 

Yes, 10-20 year term with the existing owner, paying PITI at a lower rate than you charge for the Rent to Own (Lease Option). So if PITI costs you $1000 a month, rent at $2000 a month, example. Get $5000 down for the program, and the person paying the $2k is fixing up the property with their own money, to get a better deal on the house you will sell to them in 5 years. Delay for 90 days to find someone who wants to own and can do the work and who has the cash.

Just another way to get repairs done without you putting your cash into the deal. Save it for additional properties.

some confusion I think @Jack Bobeck   is saying you buy it on contract  ( title transfers) then you lease it with option to end buyer so you don't have to do the fix up work out of pocket.

I would not do a lease option as your way of buying the property.. seller could have liens or judgements pop up on them and bugger your title after you put all this money in it.

I also think lease options for the buyers they run into the same risk.. but then again not every one is up to speed on what could go wrong.. looks good on paper and up front its the little details that can much these up.

@Jay Hinrichs I always run a simple $50 title search on any property I am looking to buy. Add a title person to the real estate team, and run searches to look for liens/judgments. 

Originally posted by @Wayne Brooks :

No down payment is legally required, but most sellers want, and should get, something down.  She'll likely need at least some relocation money, at a minimum.

 Consideration must be exchanged for a real estate transaction to be legal.

Don't blow this whole thing up because you wanted 'no money down'.  Even $1000 would be considered reasonable would be my guess.  $100?  Grey area- don't risk it.  Do reasonable consideration.  Think Judge Judy.

Whatever you do, get title.  No land contracts or contract for deed.  Good luck!

@Jack Bobeck   your missing the point  as @Steve Vaughan indicated title is important.

the issue is you tell people to buy on leave options .. the seller un be known to you gets sideways with IRS next thing you know there is a 100k lien on the property you have the option to buy.. or any other judgment that comes out of left field your against the person your in contract to buy it from.

its one thing if you have no real equity you just move on.. but it you put 50k into reno and find out 2 years down the line there is a judgment lien.. well it creates a real problem.

@Jay Hinrichs I was responding to your post about running Title Searches. As with Consideration, I agree with @Steve Vaughan . I never said to not get money down to acquire the property. You need to get the title on the property, but you also need to make sure the deal is done with the help of a good RE Attorney.  I recommend the use of professionals,building a team of professionals. A good real estate attorney and title agent can save thousands. 

Lots of good books out there on Lease Options, so lots of detail for those unsure of all the moving pieces. I like them, I think they are great because I don't put in a lot of cash. Its comfortable for me.