Seller Financing - Where to start?

Question

I'm working with a tenant who wants to purchase the home they are currently renting (and I have a mortgage on). I'm open to it, but not really sure where to begin. I know there are companies that will service the note, but I can't seem to find them. Additionally, I'm trying to figure out how to know if my current mortgage company will allow me to do this. The lease won't be up for another 6 months, so I have time to figure this out, but I'm just trying to learn where to start. I've read several articles on here, but they are extremely high level and leave a lot open. Do I reach out to a title company? A lawyer? Find a servicing company? Looking for some real direction, if anyone can offer it. Thank you all in advance!

Vaughn K. · Answer

Oh yeah, totally. I did put credits in quotes, but probably should have put "down payment" in them as well. You must use the proper legal language in the agreement of course. But in practical terms they're the equivalent of the down payment and monthly principle payments.

Jeremy Hair · Answer

Great information guys! I appreciate the feedback and I will definitely be looking into the lease option. Thank you much for the guidance.

Steve Vaughan · Answer

A proper lease option is what I was referring to.

Just change your verbage from down payment to option consideration and purchase credits to closing cost assistance and you won't get in mud as a disguised sale.

Any agreement with language that says down payment and purchase can easily be confused as being seller financing.

Vaughn K. · Answer

I agree that a lease option is the "proper" and legal way in this situation... But I wouldn't say they need to exclude a "down payment" or purchase credits. It all depends on the situation both parties are in. There are ways to do it, and if the seller needs a chunk of change, or the buyer wants to know they're getting somewhere with building up hypothetical equity if they exercise, there's nothing wrong with working those types of things out. It's situation by situation.

Steve Vaughan · Answer

A deep dive into researching wrap-around mortgages (wraps) will be required.  Lots of steps regarding type of deed, property insurance , servicing etc.

No mortgage co will allow this.  Has to be quiet and you need to be prepared to satisfy in case it gets discovered and called for DOS violation.  They will be notified if your insurance policy changes at all.

I'd much rather do a proper lease  with option to buy.  Proper LOs do NOT involve 'down payments' or purchase credits.

Maybe give your tenants a couple years to exercise.  Reduces your risk and indigestion and learning curve massively when done right.

Vaughn K. · Answer

I've never been in the situation, but have seen several other people with tons of experience who say that current mortgage holders NEVER actually call the loans. Also, can the person kick in enough down to pay off your mortgage? If they can you can pay yours off.

Anyway, another way to structure it where that issue doesn't exist at all is a lease to own contract. You can be very flexible in how you write the terms, but they can involve a down payment, higher than regular lease payments, and a "credit" from those 2 things when they're finally ready to officially purchase it by exercising the option. That way there's no official mortgage, you retain ownership and tax deductions until they exercise, and it's not a foreclosure if they can't pull it off, it's just a regular eviction still. Pros and cons, but worth looking into.

Jeremy Hair · Answer

Thank you John! Appreciate the  feedback.

John K. · Answer

You will want to 1st reach out to an attorney with knowledge in these types of transactions, so that you are in 100% compliance, at the state level. Most likely they can refer you to a loan servicer to assist you there.

As far as your existing mortgage. Most likely your lender will tell you that they could initiate a due on sale clause, that most likely exists. I'm not going to tell you if they will or not, as it's entirely up to them.

I will simply tell you this. Having done several of these myself, it has never happened or even been threatened. Furthermore, having learned from someone that has had his hand in a few thousand of these, he can count on one hand how many times it's even been threatened, but never carried out.

The reason is simple. The bank will need to make a decision on taking a performing note and potentially making it a non-performing note, with that trigger. Then there is all the costs associated with pulling that note back. The risks involved in leaving a home vacant. Then, packaging that note up and selling it for a reduced interest rate, most likely. Would not be the wisest of business decisions, on their part. With all that being said, I do realize we are talking about banks, so who really knows.

I would discuss all the possibilities with an attorney and see where your comfort level lies, after that discussion.

Seller Financing - Where to start?

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