creative seller financing question

7 Replies

Hi guys,

I was wondering if anyone with experience on the seller side of seller financing had some insight on the following: I have a rental condo that I bought for $400K in 2009 and can probably sell now for around $500K. I have about $300K left on the mortgage. It's in a 7/1 ARM at 2.875% that won't adjust until 2020.

Even with the great interest rate, the property doesn't cash flow (San Diego), some of which is because the HOA keeps jacking up fees (now $500/month). I pretty much break even each month.

My renter is interested in buying the place, and I'm interested in selling.  I'm not sure if she would qualify for a bank loan based on her income, but she's never been late on her $2000 rent each month.  An additional twist here is that if I sell by the end of February, I will save probably $20K in taxes and won't have to do a 1031 exchange b/c I would have lived in the place for 2 of the last 5 years.  I guess this would be considering a wrap around mortgage since I'd try to keep paying on my mortgage - though I do have the ability to cover if they were to activate that rare due on sale clause.

So my questions are for anyone who has had experience in structuring seller financing deals:

1) My initial thought would be to structure it to parallel my own ARM to keep her payments low for 5 years (close to what she's been doing for rent) and have a balloon payment in 2020.

2) What kind of interest rates are usually charged in this situation?

3) If I sell the place, but still pay the mortgage in this wrap around strategy, am I officially off the hook tax-wise?

4) If at some point she stops making payments, the condo would go back to me (and my bank) as lien holders, right?  And even money that went toward her principle would be forfeited? I would essentially have to foreclose on her?

5) As the owner, she would now be responsible for HOA dues and insurance; would I still need to carry any insurance?

6) Who draws up paperwork for this kind of deal?  Seems like you would need a lawyer, an agent, and maybe even a banker.

Thanks in advance for your insight!

Michael

Michael,

I would recommend drawing this up as an installment sale (Land contract).  Would allow you to take the property back easier if there is a problem with your tenant/buyer.  You should talk to one of the 1031 guys on here.  David Foster and Robert Hetsler are great resources for these type of questions.  I do not know if you eliminate your tax consequences if you finance and end up foreclosing.  That would be my big concern.

Mark

I was wondering if anyone with experience on the seller side of seller financing had some insight on the following: I have a rental condo that I bought for $400K in 2009 and can probably sell now for around $500K. I have about $300K left on the mortgage. It's in a 7/1 ARM at 2.875% that won't adjust until 2020.

THOUGHTS -- sell it now for $500,000 more or less, pay your taxes and move on to other deals.

Even with the great interest rate, the property doesn't cash flow (San Diego), some of which is because the HOA keeps jacking up fees (now $500/month). I pretty much break even each month.

THOUGHTS -- sell it to your tenant subject to a wrap mortgage for about $500,000, or sell it subject to the first and a recorded second that will equal your equity. Careful on the due on sale clause in your mortgage.

Use your second as leverage; you can use your second as a down payment on another property, you can split the notes to have more leverage (second mortgage of $200,000 with notes of four fifty thousands or two $100,000 etc.

My renter is interested in buying the place, and I'm interested in selling. I'm not sure if she would qualify for a bank loan based on her income, but she's never been late on her $2000 rent each month. 

THOUGHTS -- Refinance the property for as much as you can, take the tax free cash to invest in other real estate while giving your tenant a delayed contract of sale with payment that would cover your first and the equity in a proposed second, the delayed contract of sale could be as long as you want it to be; 5-10 years, that's up to you.

An additional twist here is that if I sell by the end of February, I will save probably $20K in taxes and won't have to do a 1031 exchange b/c I would have lived in the place for 2 of the last 5 years. I guess this would be considering a wrap around mortgage since I'd try to keep paying on my mortgage - though I do have the ability to cover if they were to activate that rare due on sale clause. THOUGHTS -- Don't understand this. (you might want to consider the exchange route, it is OK to sell for less due to the savings you will have in the exchange, depending on your tax due, you could even pay retail. Isn't that funny----- exchanges are great!

So my questions are for anyone who has had experience in structuring seller financing deals:

1) My initial thought would be to structure it to parallel my own ARM to keep her payments low for 5 years (close to what she's been doing for rent) and have a balloon payment in 2020. THOUGHTS -- Don't know how this benefits you

2) What kind of interest rates are usually charged in this situation? THOUGHTS -- That is up to you.

3) If I sell the place, but still pay the mortgage in this wrap around strategy, am I officially off the hook tax-wise?  You need to check the answer with you tax consultant

4) If at some point she stops making payments, the condo would go back to me (and my bank) as lien holders, right? And even money that went toward her principle would be forfeited? I would essentially have to foreclose on her? Yes depending on how you structure the deal. Foreclosure is expensive! I wouldn't transfer the deed, I'd do a delayed settlement. I you are going to transfer the deed, I would get cosigners to protect your interest.

5) As the owner, she would now be responsible for HOA dues and insurance; would I still need to carry any insurance? If you transfer the deed, she would be responsible for all those charges, but remember she is a tenant, and if things get tight, she might walk. She is happy with $2,000 a month and not responsible for the additional fee which may go up often. Tenants think and act differently from buyers.

6) Who draws up paperwork for this kind of deal? Seems like you would need a lawyer, an agent, and maybe even a banker.  A smart, seasoned investor knows more about alternative creative real estate contract engineering than the lawyer, banker or an agent. They think in totally conventional thoughts and limited experience, if they were as smart as us, they'd be investors!

Thanks in advance for your insight!

Michael

Have your tenant check with a lender to see if they qualify for a mortgage and have a sufficient down payment to buy the property from you.

Not sure why you would sell to them and keep their payments low unless you are just trying to mostly get off the hook from paying the HOA dues, insurance and property taxes.

If that is the case ask them how they would feel about their monthly going up by $900 or $1,000/ month. If they can't afford that then either continue on without cash flow being happy with the appreciation you have gained or sell and take your profit now.

@Michael Richardson

In section 1 of your initial question, you mentioned structuring a finance plan that matched your current mortgage with a balloon payment.   You may want to check on the legality of that.  I believe Dodd-Frank eliminated balloon payments in new residential loans.  Can anyone else comment on this?