Here is a question that I am not sure has been asked yet
I recently found a distressed seller who are in the middle of divorce and have agreed to sell their house at a reduced price and via a land contract. The terms and payments to the sellers are simply the mortgage installments as laid out on their mortgage schedule. This is great as I am getting it 40K below market, and I have to only come up with 11K with no initial bank qualifying.
I am trying to figure out a couple things before I move forward.
As the seller retains title to the propery and still holds the mortgage, will this hamper their ability to qualify for another mortgage down the line?
Essentially, I am paying the seller's mortgage as per their ammortization schedule, so from a seller's point of view, would a lending institution take this account when calc's are made on their gross debt ratios and affordability metrics?
Obviously, I am trying to convince the seller that their qualification for future mortgages (on another property) should not be adversely impacted by selling their property to me via land contract.
I am also trying to convince the seller that they can simply renew their existing mortgage when the time comes, and this way, I will still have great financing terms to work with!
Part 2 of the question is, what should my exit strategy be? Do I do a regular lease on the property (cash flow is minimail, but mortgage pay down is great)? Can I sell my contract to a retail buyer or investor (how would I do this?) - 3) Is there anyway to find a tenant buyer and do a lease option, even though I do not have full title to the property?
Congratulations for "getting your feet under someone's dining-room table".
This can be a good situation, if all the pieces are carefully arranged.
I suggest YOU make the base mortgage payments, to ensure they have been faithfully made.
This could affect the seller's ability to obtain a new mortgage, although the seller could show your payments as supporting income.
I don't know what you mean when you say, "renew their existing mortgage when the time comes". If you are talking about mortgage payoff, I suggest just let it go, at that point. The seller will then have true net income, and this is a selling point for you.
You can certainly do a "sandwich lease". In a "sandwich lease", you pay seller, and your tenant pays you. I have several. They are wonderful. Even a $200/month sandwich payment is great, if you haven't used too much cash to generate it. Do a cash on cash analysis to determine your yield on the sandwich.
$11,000 down may be a little too much to tie up in this deal. I would try for less, creatively, and save some cash for the next deal. I am a "little deal investor". I seldom put more than $5,000 cash into anything, but I do a lot of little deals. Others do bigger deals. Maybe they are smarter. That is your choice. I think it is smarter to reduce exposure over many little deals, than all in one deal. You might try for three (or more) payments, instead of one.
The seller has some exposure here, but that is another discussion.
Here is the important thing. You are getting out there, making offers. Good for you! If you make at least two offers each week, you will be successful. (And if you aren't thrown out the door at least once a month, for making a low offer, you are offering too much. LOL.)
First of all, those of us below the 48th, need to pay attention to advising or commenting on what someone under the Queen's influence should or could do.
In a CFD, we have the due on sale issues.
Here, a seller will be tagged in their ratios applying for a new mortgage. CFDs are generally viewed as a lease, using 75/80% of the buyers' payment to offset the mortgage liability. After two years of demonstrated payments a lender may recognize the sale and no count the underlying mortgage obligation. Varies to lender and loan types. So, no, I doubt your seller can avoid the underlying mortgage payment being considered, at least by our standards.
Secondly, a financing contract is a unilateral contract, meaning one party must perform and the relationship is unique between those parties. That requires that consent must be given by the non-performing actor, the seller must agree to allowing another to take the place of the buyer.
We also have a much better solution, the Subject-to transaction, taking title subject to the underlying lien. Take title then you can do what ever an owner can do, you are the owner in title.
Down here, the only rights that may be conveyed are those we hold an equitable interest or title to. We have an equitable interest in or to a purchase contract, that interest can be conveyed. A lease is an agreement for possession and interests in and to title, mention that as local custom plays on the rights taken by the buyer in a CFD, there are many functions that an owner it title may accomplish that are not allowed by a buyer under a CFD.
Point is, you can't convey rights you don't have. I can't buy under a CFD and then sell subject-to proving a deed since I'm not in title. I could buy subject to taking title and then sell on a CFD.
Trying to do a lease option behind a CFD must be subject to your performance buying before you can convey title under an option. That needs to be addressed in your option. You also can't give an option beyond the term of your purchase agreement.
It is customary for a buyer under a CFD to contract to sell, list the property for sale, not much attention is paid to leasing, it does matter to the title company in lining up who's interest are closed first. So, when lining up transactions to convey interests first look to your interest, then to the order of conveyances required to reach the ultimate end conveyance.
Another caution down under is to usury law and attempting to add interest to a subsequent buyer over that of underlying mortgages, this becomes complicated as the end buyer is paying a weighted rate of interest as a per cent of the underlying mortgage and equity financing, if any.
Might search here "issues with CFD", we also have concerns of executing deeds in escrow, taking a deed in lieu of foreclosure, circumventing foreclosure laws, buyers not being in title to conduct repairs with contractors, being unable to obtain building permits, insurance loss coverage and claims being paid, owners in title encumbering title, issues arising from equities to be paid under any event of government placing liens or events of eminent domain. Other than that, CFDs have been popular historically, due to more current concerns of the day they are falling out of favor quickly. :)
@ Joseph Bell, Bell G
Thankyou both for responding to my question.
In Canada, CFD is called an "agreement for sale", and a caveat is registered at the land title's office - The existing mortgagee is not involved in the process (and as of this writing, has not enforced the Due on Sale clause, as long as the payments have been made on time.
The property itself is worth $450,000 (prices are very expensive here), so $11K down seems to be a good deal for me.
Quoting a vetran real estate lawyer in the province I work from:
"With a properly negotiated and drafted real estate purchase contract and AFS, you may be able to:
i. assign your interest in the AFS (sell your contract), or;
ii. lease-option the property to a tenant buyer, or;
iii. sell an option without a lease, or;
iv. make a straightforward sale at a profit to another buyer.
To me, doesn't this seem like you have quite a bit of power, even if you do not have title to the property?
I am not sure the exact mechanics behind the 4 points mentioned above, but that's a different story
Bill, getting back to your comments that I quote below
"Trying to do a lease option behind a CFD must be subject to your performance buying before you can convey title under an option. That needs to be addressed in your option. You also can't give an option beyond the term of your purchase agreement. "
Do you mean to say that if I do a CFD, and then hand out a lease option to a tenant buyer, I must first fufil my CFD contract before the lease-option cean be exercised by the tenant buyer?
Your next quote
"It is customary for a buyer under a CFD to contract to sell, list the property for sale, not much attention is paid to leasing, it does matter to the title company in lining up who's interest are closed first. So, when lining up transactions to convey interests first look to your interest, then to the order of conveyances required to reach the ultimate end conveyance. "
Just to clarify, do you mean to say that as a buyer under CFD, I do have the authority to list the property for sale? I do intend to get Power of Attorney from the original seller for this specific property as well.
Do you mean to say that in a way this is a double close, whereby I take the cash and mortgage from the end buyer to pay off my commitments to the original seller?
Thanks for your thoughtful reply.
I'll be upfront that we have thus far avoided land contracts - my partner and I have entertained them on a couple of occasions, but that was as far as it went. We've stuck to using options.
The understanding I came away with is a Land Contract /CFD in Canada only *really* works if does not go beyond the Vendors next mortgage renewal. Registering the contract at the title office may well prevent the Vendor from being able to place a new mortgage when the current term completes.
If you check the banks covenants in their mortgage subscription agreement, you might well find registering such a contract will provide them with the option to accelerate repayment of the note. In reality, it probably won't happen as long as things sail along smoothly ... it is unlikely the bank will even notice the registration unless something else gets their attention - like an approaching end of term.
@ Roy N:
Yes, I fully see your point - Ofcourse, the renewal always pose a tricky challenge with a chance for the acceleration clause coming into effect.
To my knowledge though, if the seller decides to use the same bank and simply renew the mortgage, it may not be a problem. From what I have been told, as long as the monthly payments are done on time, the bank sends in a notice of renewal, I do not think they check credit, income levels, or do a title check. This is my understanding, but I may be wrong?
At renewal time, the bank may well check the title. In addition, your attorney will be obligated to disclose the registration to them pending the instructions issued by the bank.
You are correct that it may not be a problem, but you will be operating at the pleasure of the bank and will not be in complete control of your deal. In short, you should have a plan 'B' in the event the bank does not play along at renewal.
One other thing to verify is what the existing mortgage subscription has to say about the assignment of rents. It is quite possible it may require the consent of the lender.
In addition, the existing mortgage will continue to be in the Vendor's name and will show on her/his credit standing. In turn it may impact the Vendor's ability to secure another mortgage pending their DTI.
Missed your questions above, sorry, the answer to all three is yes.
It is the option contract that should mention the option sale being subject to conveyance of title under an installment contract to convey good title.
I do have a question as to your quote of a local attorney, as to assigning the AFS/CFD;
I believe he means the seller may assign the contract not that a buyer may assign the contract.
Back to reasoning of describing an underlying installment where title is not obtained by the buyer, making the subsequent transaction subject to a deed conveyance:
If you don't hold title, you should not contract to convey it. While in years past it was customary to execute a deed to convey and hold that deed in escrow, may sound safe but several issues may arise that hinders a future conveyance.
1. deeds are often misplaced, I've seen installment contracts fully amortized over 15 and 20 years! The attorney passes away who held the deed, his/her office is cleaned out, duties transferred by the Bar or other arrangements and that trustee must be tracked down, often finding that the executed deed was lost.
2. often buyers and sellers would DIY the deal, no title examination was done. Title issues may arise making the timely transfer of title difficult or impossible, "timely" while your obligation was made to deliver title you can't perform.
3. Sellers may liquidate notes/contracts and often assignments of a CFD are done improperly as if they were a note with collateral assigned, not the case with this installment sale. The contract is assigned and the ability of the new holder of the contract finds they can't execute and convey title.
4, investors need to always consider how their contracts will or could be effected by "life events", people die, become incapacitated, divorce, go bankrupt, they may be sued, medical liens by government can come into play and people are incarcerated.
5. murphy's law applies.
All these issues can generally be cured in time. Problem is the buyer may not have time.The issue is that you contracted to sell and you can't perform. the buyer can sue you and your excuse however valid or it being beyond your control is that you may end up owing payments made for years.
Now, compounding these issues, you buy under a CFD, you enter a lease-option and your buyer moves in. Two year later, your tenant decides to sell and obtains a buyer. That is not in your control as anyone may contract to sell a property they have an interest in. That end buyer spends a couple thousand in loan fees and inspections, that end buyer sells their home and stores property moving into some motel for a week prior to their closing. Your tenant buyer can't perform because you can't perform, financial damages can easily exceed the value of the property or contract.
Always make future contracts stemming from an installment sale subject to the settlement of that underlying sale.
And, yes, settlements are basically simultaneous sales, back to back recordings to provide the chain of title. :)
Hey all, an update for you:
I got my first property under agreement for sale, and just closed on it with little down. Its not cash flowing, breaking even, but I am paying the mortgage off. I have a power of attorney to sell the house as long as the underlying mortgage plus any penalties is paid out. All in all a good deal with both the seller and me. Thanks guys for all your suggestions!
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