Seller owes 150k on a 400k 3 unit.
He’s interested in seller financing to defer capital gains.
What creative financing option would make the most sense for he and I?
Seller finance, sub to, wrap around etc. and why?
The answer is dependent on what you both want the most. For example, do you want more or less control? Do you trust the seller will make payments on the existing debt or do you use a 3rd party servicing company? Are you concerned with his current lender calling the note due on sale? What is the sellers age and if they pass away, will his heirs understand the deal you made? Etc.....
After you get all your questions answered, then you structure the deal accordingly. We can all give you advice on BP, but we don't know any of these answers and are just guessing about what is best.....
Personally, I like the wrap around mortgage with a 3rd party servicer handling the monthly payments to keep everyone honest. You should have the ability to payoff the 1st position note in the event that they call the note due though.
Thanks for the reply Derek.
Seller & I haven’t hashed out the specifics.
He’s 68 years old and I was just wondering what options I could bring him.
With the wrap around I’d be paying his remaining mortgage balance, then paying him an agreed amount monthly for his equity/a potential down payment?/balloon?
Seems difficult to get cash flow that way. Although I suppose it beats 20% down.
You must know the numbers that work for you BEFORE you offer anything. If you want a certain amount of cash flow, your monthly payment has to be structured accordingly. If the seller cannot agree to that, it's not a deal that is mutually beneficial and you walk away.
My goal is to hold his 3 unit long term.
At this point I’m just wondering what the difference is between doing a sub-to and giving him extra monthly + potential down payment & just wrapping the first note with an additional note. It seems no different? He just wants to be done with the property and have a steady income from it + some cash. Both these options sound the same with different names.
They are very similar. The difference is the CONTROL issue I mentioned before. Subject to gives you more control vs a wrap. That's why I said we can't answer your questions without having more information
In this case, the control Derek is referring to is ownership. In either case, you may or may not get a Deed. I would encourage you to get a Deed if at all possible.
As for me, I like control / ownership. It's not that I don't trust people, but even with a 100% trustworthy person...stuff happens. I want to be involved so I can react if the Seller can't or won't react. I want to get the notices if tenants are destroying the property and violating city codes. I need to know the taxes are paid and insurance is current. And I don't want to end up in the newspaper/local FB feed in an article like this: "Greedy investor/scammer cheats heirs out of Dad's property...." You know what they say, "If it bleeds, it leads...." Truth is not so much a media virtue these days: clicks and sensational stories are the norm.
Sounds like that can be a hard sell to a seller.
His PITI is $1,900.
Building value 400k
His goal is some cash in his packets and monthly payments with an undisclosed balloon.
What would a good offer look like to a seller in this situation? I’m not trying to rip him off but I also think the control from sub-to is more appealing to me.
@Account Closed , put yourself in the Seller's shoes for a moment and ask yourself what you'd want most in this situation. Do you care most about getting the maximum dollar, or do you care most about reliability of the Buyer? Generally, you get more of one and less of the other. For example, a sketchy/unproven Buyer might have to offer a higher down payment whereas a rock solid Buyer with a track record of excellent and referrals for successfully completing these kinds of deals could probably negotiate a lower price.
Sounds like you may not have much experience doing these kinds of deals, so what can you offer that will win the Seller's trust? Maybe you offer a higher interest rate, more money down, some kind of guarantee (i.e. lien on the title to another house, boat, car, etc). If you have solid business references, that may also help.
A wise friend/mentor told me once that selling is a transfer of belief. In this case, you are "selling" yourself as a reliable Buyer who will make sure the deal gets done as spelled out on paper. Talk to your Seller, find out what his concerns are, and get creative finding ways to alleviate his concerns.
You're right; it is a hard sell. That's why in real estate "cash is king" whereas creative finance requires more work.
I 100% agree.
However, per the way our conversation goes monday when we meet in person I'd like to have the knowledge to explain things to him. I know his PITI. I know his goal is some money down, and monthly payments.
What I don't know is how to structure or vocalize the deal.
"Thats great so what we can do is I can offer you X amount cash down, I can take over your mortgage, and we can discuss a payment + balloon for your equity."
At that point he accepts and we agree on terms for the equity..
Would I then vocalize that I will have an attorney draft the paperwork and get it over to him? Do I contact his bank and let them know I'm taking over. I have the gist of the deal I just need the small details.
I see. You're asking for things I have considered but never actually done myself. I've never done a wrap or Subject-To, though I have spoken to several Buyers who have. Again, I recommend asking him questions and letting him fill in the blanks for you. Example...
You: (after the offer is agreed). "Now Mr. Seller I want you to be comfortable that everything we just agreed to will happen as we stated. Would you feel comfortable having an attorney we both choose draft the paperwork, or would you like for me to have my attorney draft it and then you can review it with your attorney?"
Seller: "I think I'd like to have my own attorney review our agreement."
You: "Certainly, and then we can hash out anything that needs to be clarified to our mutual satisfaction. Now as you know this deal means we'll be making payments to the bank for you. Would you like me to contact them to explain the situation so they're in the loop or do you prefer we just send you monthly confirmation printouts from our bank that the payments are being made?"
Seller: "Well, our note has a Due on Transfer clause, so we probably don't need to get anyone upset for no reason. As long as I see the payments being made I'm satisfied."
The best salesmen always ask questions.