Creative financing and sub2

[Felipe Dossou]

I am trying to understand what would convince a seller to accept a sub2 agreement aside from being offered more money for property and favorable terms? If I understand correctly, a deed is transferred to buyer, but the mortgage note remains under seller’s name, which means if buyer defaults on making payments, the sellers credit history is effected.  Thus I am trying to understand the benefits for the seller aside from above. It definitely seems like a good strategy.  Please provide insig

[Don Konipol]

@Felipe Dossou

In a market like the current one sellers have little motivation to consider a subject to deal, as they can probably readily sell at a profit.

The real motivation comes when one or more of these are present, and it’s usually in a market where prices have dropped, interest rates are high, and demand is low

1. The seller owes more than he can net sell the property for

2. Condition of the property is such that financing is unavailable

3. Interest are high so buyers are unable to qualify

4. Market conditions are such that a severe price reduction would be required to sell the property

5. The seller is under time constraints and “time on market” is long

[Felipe Dossou]

Thank you for the insight.

[Felipe Dossou]

Would the same factors apply to seller financing?

[Don Konipol]

@Felipe Dossou

Yes, and more so…unless the interest rate offered resulted in an attractive investment to the seller.

[Felipe Dossou]

Don have you done seller financing before?  if so could you provide an example?

[Don Konipol]

@Felipe Dossou

Sure. In 2014 I lent about $180,000 secured by a former community center building that an investor purchased as was going to turn into a neighborhood for profit after school center. After successfully operating this property for 2 years, the owner went through a divorce, stopped operating the business, and stopped making note payments. We foreclosed, and entered into a protracted legal battle as the owner/borrower used any and every tactic to delay the foreclosure. Fortunately, we were able to obtain a good portion of our legal fees from the borrower and her attorney, as a judge ruled that many of the borrowers lawsuits filed to stop the foreclosure were frivolous.

Unfortunately, during our 18 month battle to gain ownership, vandals had stripped the property of HVAC units and copper piping. We placed the property on the market for sale or lease, knowing that the condition of, and type of property made regular financing impossible. We received an offer from a church group that wanted to lease the property, but wanted me to do about $200,000 in repairs and improvements.

My counter offer to them was for them to purchase the property instead, and obtain a community improvement loan for the repairs/improvements while I would owner finance a majority of the purchase price. The caveat was that the interest payments on the community improvement loan and the interest payments on the seller financed loan would be equal or less than the triple net rent payments they would have been paying. The church had a cash flow sufficient to pay the amortized portion of the notes and willingness to as they realized they would end up with ownership of a significant valued asset.

We sold the property to the church in 2018 for $240,000 with $40,000 down payment and a $200,000 note at 7% interest and fully amortized over 10 years. Every monthly payment has been made on time; the church is currently qualifying for a lower interest loan and will pay us off with the proceeds.

[Felipe Dossou]

Thank you for that example. Moreover, I came across a listing that is a 32 unit property in class A neighborhood and is a value add property.  The rent is under market value.  The listing price is 5M, which is the the price range my partners and I are targeting.  Our target price range is between 1M -1.5M with 500-600K to utilize as equity.  When I mentioned to the broker that it was way out of our price range and the only way I could taken on such a a property was through seller financing, he replied by that is an option and to get back to him if we wanted to place an offer.  I would appreciate some insight if you had any.