Help with a Motivated Seller - 4 Family with Equity

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Help with a Motivated Seller - 4 Family with Equity

Brett C.
Rental Property Investor · NH · Member since 2013 · 111 posts · 28 votes
Hi Everyone, I need help identifying a strategy for a deal I'm trying to pin down. I have a motivated seller with a 4 family. They have just a handful of years left on a 15 year mortgage, I don't know the exact amount they owe but I can ballpark it and they've got strong equity. What strategy can/should I use? I'd like to do a seller financed deal but they still owe money. I think the seller primarily wants to cash out completely, HOWEVER they have a sizeable portfolio of investment properties and I think they would be interested in a situation where they get out of the management of the property and I work out financing with them to where they just collect, similar to a seller financed or lease options. I'm closing on a SF in a couple weeks and I don't have a lot of money to put to put down. I'm stuck guys, please help. If they owed nothing I believe they would happily do 10% down and seller financing for the balance but they don't own it free and clear yet so 10% won't even get us the deed. Thanks for any advice or even pointing me towards literature/books with strategies that could help would be appreciated.
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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    You could try to wrap around the existing mortgage with a seller financed second note.

    Example property is worth 200k and seller owes 75k. You do a purchase price of 180,000 and create a new note that is secondary to the first one.

    Payments need to be completed by a third party servicer to insure your monthly payment goes to service the first note and then give extra proceeds to the seller. Otherwise the seller could run with the money but not likely if they have substantial equity.

    For no money to put down it is doubtful a seller would do this. The bank cold call the DOS clause if they find out the seller wrapped and in addition since you have no reserves to handle the property if issues arise the property could go back worse to the seller than when they financed you.

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  • Brett C.
    OP
    Rental Property Investor · NH · Member since 2013 · 111 posts · 28 votes
    13y

    OK I see. In this strategy the only thing in it for the seller really seems to be that they relenquish the management of the property over to me. The spread between my note and their note probably won't be too enticing.

    What would happen when they are done paying their original loan? I've only just recently tried to understand wraps and I suspected that might be the suggestion I got but I wasn't sure if there was a better vehicle for this situation. I don't understand this strategy, it seems like the original loan is still in place so wouldn't that mean technically the deed would below to the seller I set up the second note with?

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  • Brett C.
    OP
    Rental Property Investor · NH · Member since 2013 · 111 posts · 28 votes
    13y

    PS Joel, thanks so much for your input/advice!

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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    13y

    If all they want is to get out of managing it. Do a Master Lease.

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  • Brett C.
    OP
    Rental Property Investor · NH · Member since 2013 · 111 posts · 28 votes
    13y

    too funny, I swear I had a sentence in my response to Joel that said "what about a master lease, I don't know much about them but wouldn't that work?" but I deleted that sentence bc I didn't want to sound uber newbie.

    I'm researching the strategy right now, thank you!

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  • Bill Ham
    Commercial Landlord · Macon, GA · Member since 2013 · 79 posts · 33 votes
    12y

    @Brett C. A master lease is simple. It is a contract that will allow you to "lease" the property with the right to sublet it to a tenant. You will want a separate agreement that give you the right to purchase the property for a set price and gives you a set time in which to close the deal. This is an option to purchase. Together they would make a master lease option.

    P.S.

    Don't feel dumb or like a "newbie" for asking any question. That's what BP was created for. Were here to help!

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  • Brett C.
    OP
    Rental Property Investor · NH · Member since 2013 · 111 posts · 28 votes
    12y

    thanks so much @Bill Ham

    I just read your blog on MLO and I understand it much better. I do want to learn more though about "seasoning", and what exactly I need to show for CF and for how long to have confidence I could execute the exit strategies, the first being to refi into a traditional loan.

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  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Brett C. , if the Sellers are willing to take a second note and your credit is good enough to get a loan just buy it, get your 75% financing from the bank, pay off their note, give them the balance. Their 2nd mortgage could be at a low interest rate, and you could make small payments with a 5 year balloon and you could refinance then to pay it off. If your cash flow is good enough you pay the 2nd off in 5 or 6 years.

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  • Bill Ham
    Commercial Landlord · Macon, GA · Member since 2013 · 79 posts · 33 votes
    12y

    @Brett C.

    "Seasoning" means the time in which you need to own an asset before the bank will consider refinancing it without considering the original sales price for the loan to value.

    If you buy a house and own it for 1 week the bank is not likely to let you immediately refi and use the appraisal amount to base the loan on. If you owned if for 5 years they would. The time you own it is the "Seasoning" period. Longer is better.

    Talk to your lenders to find out what seasoning they would want to see from you. It will change from lender to lender and property type may affect it.

    If you plan to use seller financing, the seasoning period will be a big part of negotiating the terms with the seller and you should know your exit options before you make any offers.

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