Seller Financing OR Option to Purchase- HELP!

Rehabbing & House Flipping
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Seller Financing OR Option to Purchase- HELP!

Account Closed
Orange, CA · Member since 2012 · 66 posts · 17 votes

Hi Everyone,

I'm not an expert on creative financing deals, so I'm reaching out to those who are.

I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo. (The perfect scenario for my typical all cash offers, as long as we can agree on price.) He also doesn't need the money immediately. At first I offered my typical low, all cash offer. He wants a little more, and I cant make money off it at the price he wants (since its not my cash, I am using hard money.)

So I asked if he would consider carrying the loan for me and that I might be able to pay more as long as theres no interest. Basically like a partnership. He lets me fix up his condo, list it and sell it, and I get whatever we agree upon now. I think this is called an Option, or is it seller financing with 0 interest?

So how do people make deals like this work? What kind of documents/contracts would I use? Should I even do it? I go to REI club meetings where they talk about seller financing all the time, but I have no clue how to move forward. And how do I protect myself from the seller going out from under me and selling the property after I spent money rehabbing the place??

Thank you to anyone who can help guide me a little!

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Account Closed
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Originally posted by @Account Closed:
Hi Everyone,

I'm not an expert on creative financing deals, so I'm reaching out to those who are.

I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo. (The perfect scenario for my typical all cash offers, as long as we can agree on price.) He also doesn't need the money immediately. At first I offered my typical low, all cash offer. He wants a little more, and I cant make money off it at the price he wants (since its not my cash, I am using hard money.)

So I asked if he would consider carrying the loan for me and that I might be able to pay more as long as theres no interest. Basically like a partnership. He lets me fix up his condo, list it and sell it, and I get whatever we agree upon now. I think this is called an Option, or is it seller financing with 0 interest?

So how do people make deals like this work? What kind of documents/contracts would I use? Should I even do it? I go to REI club meetings where they talk about seller financing all the time, but I have no clue how to move forward. And how do I protect myself from the seller going out from under me and selling the property after I spent money rehabbing the place??

Thank you to anyone who can help guide me a little!

You buy the property for the agreed upon price. He carries back a promissory note secured by a deed of trust. You use your money or private money to rehab and carry the property (taxes, insurance, HOA, utilities, loan costs). You the list it and resell. When you resell, escrow pays off the loan. It's just like any other rehab deal, except the seller is the lender.

There are a ton of other ways to do it, but IMO this is the cleanest. You own all the equity and any profit you create. But you also have to find the money for the rehab and take all the risk if it doesn't sell.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Account Closed:
    Hi Everyone,

    I'm not an expert on creative financing deals, so I'm reaching out to those who are.

    I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo. (The perfect scenario for my typical all cash offers, as long as we can agree on price.) He also doesn't need the money immediately. At first I offered my typical low, all cash offer. He wants a little more, and I cant make money off it at the price he wants (since its not my cash, I am using hard money.)

    So I asked if he would consider carrying the loan for me and that I might be able to pay more as long as theres no interest. Basically like a partnership. He lets me fix up his condo, list it and sell it, and I get whatever we agree upon now. I think this is called an Option, or is it seller financing with 0 interest?

    So how do people make deals like this work? What kind of documents/contracts would I use? Should I even do it? I go to REI club meetings where they talk about seller financing all the time, but I have no clue how to move forward. And how do I protect myself from the seller going out from under me and selling the property after I spent money rehabbing the place??

    Thank you to anyone who can help guide me a little!

    You buy the property for the agreed upon price. He carries back a promissory note secured by a deed of trust. You use your money or private money to rehab and carry the property (taxes, insurance, HOA, utilities, loan costs). You the list it and resell. When you resell, escrow pays off the loan. It's just like any other rehab deal, except the seller is the lender.

    There are a ton of other ways to do it, but IMO this is the cleanest. You own all the equity and any profit you create. But you also have to find the money for the rehab and take all the risk if it doesn't sell.

    4Reply
  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    12y

    @Account Closed

    What a great opportunity to learn how to be a better investor. This will take you up a notch from the typical "one trick pony" investor with only "one & done" offers.

    There are many ways to structure this transaction. K. Marie Poe gave you a great example.

    When I approach this type of situation I like to have more in depth info before I propose solutions to the seller. ( sellers expectations, wants & needs, current rent, market rent, expenses, existing loan balance & terms etc.)

    It would be cool if this transaction could be done using your IRA (or someone else's) to buy an option.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Several things to address. What's the property really worth, was that a low ball offer he turned down? Doing any financing dance over this won't make the property worth more, it either meets your profit requirement or it doesn't. How long do you want this?

    You can't really lease and have an option that gives you any rights to rehab the property, not a good way to go.

    To rehab you need title. There's many ways to do this, first I assume he doesn't have a mortgage, right?

    You can also put the property in an LLC and partner with him, that can be very simple or complicated, depending on how motivated he is.

    Please never speak of zero interest loans again :) they cause imputed tax rates that, to some sellers, if brought up and suggested by you, can backfire on you from putting them in a financial loss down the road. Best not to go there, pay interest on the same payment and reduce the loan/sale price accordingly.

    About how old is he, any health issues, how's his financial position roughly? These can all play a factor in getting the best win-win deal. :)

    0Reply
  • Account Closed
    OP
    Orange, CA · Member since 2012 · 66 posts · 17 votes
    12y

    @Account Closed

    Thank you so much for your answer!!! Do I need to get attorneys involved to draft the promissory note? Or are their any samples out there?

    Who could help me with the process, a lawyer or escrow?

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Bill Gulley:
    Doing any financing dance over this won't make the property worth more, it either meets your profit requirement or it doesn't.

    Agreed, the financing does not make the property worth more, but I don't believe that is what she is saying. if her hard money loan costs are say $20k over a 5 or 6 month period, and by receiving owner financing, she can avoid those costs (or a portion of them), then she could "afford" to pay more for the purchase price in exchange for better terms which ultimately save money.

    I like how you are looking to get more creative and provide multiple options for you to purchase and he to sell. That is very good. Work out some numbers, calculate what your initial and monthly costs would be on your typical HML or private money loan, then you know what your costs are. From there, you know how much more you can pay for a lower interest loan of say 2%.

    Though an option, I would not suggest the LLC partnership on this type of deal, stick with seller being a straight lender. That form would be a promissory note and deed of trust (or mortgage if in a mortgage state). Use an escrow or attorney for the closing and a purchase and sales agreement for the transaction.

    Podcast Guest on Show #130
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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    12y
    Originally posted by @Account Closed:
    Hi Everyone,

    I'm not an expert on creative financing deals, so I'm reaching out to those who are.

    I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo. (The perfect scenario for my typical all cash offers, as long as we can agree on price.) He also doesn't need the money immediately. At first I offered my typical low, all cash offer. He wants a little more, and I cant make money off it at the price he wants (since its not my cash, I am using hard money.)

    So I asked if he would consider carrying the loan for me and that I might be able to pay more as long as theres no interest. Basically like a partnership. He lets me fix up his condo, list it and sell it, and I get whatever we agree upon now. I think this is called an Option, or is it seller financing with 0 interest?

    So how do people make deals like this work? What kind of documents/contracts would I use? Should I even do it? I go to REI club meetings where they talk about seller financing all the time, but I have no clue how to move forward. And how do I protect myself from the seller going out from under me and selling the property after I spent money rehabbing the place??

    Thank you to anyone who can help guide me a little!

    To address your concerns of the seller going around you, having something recorded on title to secure your position is a good idea. I encourage you to get the proper legal guidance on this transaction as Will Barnard said, & perhaps consider working with an experience investor in your area to help you put together the deal. That could be an amazing experience for you to learn.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    I really don't think she meant the condo development Will, I'm thinking it's a small single unit, so 20K in costs is probably not an issue. The value in the deal is what the difference would be in conventional financing, yes, 2/3K, and if it doesn't sell, she'll need to refinance it, that's another issue.

    How many times have we posted this?

    Not knowing the cash down and the LTV prompted me to mention the LLC as more often a seller will allow a partner feeling they still have some control in the deal allowing the partner to "earn" their way in.

    But, if there is a chance of doing a higher LTV or with cash down, the note and deed of trust is the way to go. It's best not to get creative unless there is a need to. :)

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Considering she is from OC in So CAL, a condo could easily be $400k. The $20k was just a number out of the sky for an example, nothing more. Point is, whatever the number of the hard money lender costs she would typically incur, if that could be reduced by going seller financing, then she could afford to get closer to what the seller wants in price. This does not make the condo worth more, just gives the buyer an alternative to make a higher offer price due to the seller financing IF that said financing is less expensive than the HML.

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  • Account Closed
    OP
    Orange, CA · Member since 2012 · 66 posts · 17 votes
    12y

    Don't make fun of me, but how do you do that "originally posted by: @Will Barnard: thing??

    Agreed, the financing does not make the property worth more, but I don't believe that is what she is saying. if her hard money loan costs are say $20k over a 5 or 6 month period, and by receiving owner financing, she can avoid those costs (or a portion of them), then she could "afford" to pay more for the purchase price in exchange for better terms which ultimately save money.

    Yes, that is what I meant. Basically I would be giving this guy the money I would give to my HML. So he is happy because he gets a little more money, and I am happy because I got the deal. This creative financing stuff makes my head spin. I'm totally a one trick pony @Ellis San Jose !! :) But I'm trying to break free of that... I agree I wish I had someone who was good at creative finance deals in the OC area. I would totally split the profits so I can get the experience. Know anyone???

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    @Account Closed - use the "Quote" link to the left of the post that you wish to bring up.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Lauren, I promise not to make fun of you if you don't make fun of me, deal? :)

    Hey, our first deal together already!

    I happen to know a thing or two about creative financing with sellers. I could help you and I know many others such as Ellis as well.

    To do that "originally posted by" thing, you go to a post and under the profile picture of the poster, there is a link called "quote" that will quote (or copy) their entire post in a reply for you and then you can start typing your response. You can also delete portions of that quote if you want

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    1Reply
  • Account Closed
    OP
    Orange, CA · Member since 2012 · 66 posts · 17 votes
    12y
    Originally posted by @Will Barnard:
    Lauren, I promise not to make fun of you if you don't make fun of me, deal? :)
    Hey, our first deal together already!

    I happen to know a thing or two about creative financing with sellers. I could help you and I know many others such as Ellis as well.

    To do that "originally posted by" thing, you go to a post and under the profile picture of the poster, there is a link called "quote" that will quote (or copy) their entire post in a reply for you and then you can start typing your response. You can also delete portions of that quote if you want

    Hey Hey!!! I did it! I just emailed you @Will Barnard

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Got it, thanks.

    Podcast Guest on Show #130
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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Account Closed:
    @Account Closed

    Thank you so much for your answer!!! Do I need to get attorneys involved to draft the promissory note? Or are their any samples out there?

    Who could help me with the process, a lawyer or escrow?

    The numbers are everything. What's the ARV, what's the seller want, how many repairs? Be sure to include all the holding costs and the selling commission and your closing costs for both the buy and sell escrows. You may find that the seller's asking just won't work.

    Write a simple purchase offer and then escrow will do the rest. They do the title report, prepare the deed and note/deed of trust, etc. (You can even go right to escrow without a purchase agreement but I don't recommend it. You want something in writing that commits the seller. Other buyers always seem to have a way of showing up when deals are pending. Just saying.)

    Your purchase offer would be the total purchase price and will indicate the amount of down payment you have, the interest rate, the payoff date, and the type of payment (interest only or amort. over the 30 years etc.)

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Will Barnard:
    Considering she is from OC in So CAL, a condo could easily be $400k. The $20k was just a number out of the sky for an example, nothing more. Point is, whatever the number of the hard money lender costs she would typically incur, if that could be reduced by going seller financing, then she could afford to get closer to what the seller wants in price. This does not make the condo worth more, just gives the buyer an alternative to make a higher offer price due to the seller financing IF that said financing is less expensive than the HML.

    Cheap financing makes all the difference in a mid-range CA deal. Leveraging with seller financing can really contribute to the bottom line and be the difference between a profitable deal and no deal.

    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Account Closed:

    I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo.

    Lauren: I missed the tenant thing on my first read. You really have to take into account the cost of getting rid of the tenant. By CA law if they've been there more than a year, they get 60 days notice. So you're looking at A MINIMUM of 60 days holding (plus a little income). Or you could try the buy off route. But the trade off would be a payout and probably can't happen faster than 30 days anyway. It's the rare So Cal tenant that can pick up and leave, regardless of how much cash they have. Where will they go, what will they find that is comparable, etc.

    The other thing I've found is that many sellers are hoping for me to commit to keeping their tenants. They want way more than not being the bad guy. They are actually hoping to preserve the tenancy. All well and good except the unit isn't worth as much with tenant, especially one paying below market rents. Be sure to get the real story from your seller. It may be that they are just hoping and praying for a miracle buyer and that they are no where near ready to sell.

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Under ALTA regs, and with regard to TILA if it applies, you can not go to escrow or closing without a valid contract, that is the source document to establish any closing, even in the Great Republic of Cali. If you can't write a contract, get help! :).

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Bill Gulley:
    Under ALTA regs, and with regard to TILA if it applies, you can not go to escrow or closing without a valid contract, that is the source document to establish any closing, even in the Great Republic of Cali. If you can't write a contract, get help! :).

    Not sure my escrow agents at Chicago Title agree with you on that. They did my last two purchases with escrow instructions only. No purchase agreement or contract was submitted to escrow, one of which included the seller carrying back 90%.

    Escrow instrux are binding here, but IMO it's advisable to be contractually bound asap under most circumstances.

    2Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Account Closed:
    Originally posted by @Bill Gulley:
    Under ALTA regs, and with regard to TILA if it applies, you can not go to escrow or closing without a valid contract, that is the source document to establish any closing, even in the Great Republic of Cali. If you can't write a contract, get help! :).

    Not sure my escrow agents at Chicago Title agree with you on that. They did my last two purchases with escrow instructions only. No purchase agreement or contract was submitted to escrow, one of which included the seller carrying back 90%.

    Escrow instrux are binding here, but IMO it's advisable to be contractually bound asap under most circumstances.

    K. Marie is right, escrow instructions is the only requirement for closing, I have done the same on two occasions with just escrow instructions and no purchase contract.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y
    Originally posted by @Account Closed:
    Originally posted by @Bill Gulley:
    Under ALTA regs, and with regard to TILA if it applies, you can not go to escrow or closing without a valid contract, that is the source document to establish any closing, even in the Great Republic of Cali. If you can't write a contract, get help! :).

    Not sure my escrow agents at Chicago Title agree with you on that. They did my last two purchases with escrow instructions only. No purchase agreement or contract was submitted to escrow, one of which included the seller carrying back 90%.

    Escrow instrux are binding here, but IMO it's advisable to be contractually bound asap under most circumstances.

    Closing instructions are usually issued by the lender. What's your source document for the audit trail for taxes?

    Seems whatever is usual, customary and generally required there's always an exception by K. Marie as it's done in her area. I've never closed anything in CA, guess I'll put a blanket statement on my profile that nothing I say applies to that area or state. :))

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y
    Originally posted by @Will Barnard:
    Originally posted by @Account Closed:
    Originally posted by @Bill Gulley:
    Under ALTA regs, and with regard to TILA if it applies, you can not go to escrow or closing without a valid contract, that is the source document to establish any closing, even in the Great Republic of Cali. If you can't write a contract, get help! :).

    Not sure my escrow agents at Chicago Title agree with you on that. They did my last two purchases with escrow instructions only. No purchase agreement or contract was submitted to escrow, one of which included the seller carrying back 90%.

    Escrow instrux are binding here, but IMO it's advisable to be contractually bound asap under most circumstances.

    K. Marie is right, escrow instructions is the only requirement for closing, I have done the same on two occasions with just escrow instructions and no purchase contract.

    Same response Will, LOL.

    Going without a contract is a bad idea IMO, I have no idea who issued the closing instructions but they just sucked up more liability by giving directions for both sides of the transaction and I have no idea what the letter included but the contract is a source document agreed to by both parties, not a declaration by one party.

    I'll have to figure out how to exclude Cali from the rest of the country I guess. :)

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    @Account Closed undefined

    @Will Barnard

    Let me direct you to 12 CFR Part 1204, Section J for the verification and source document to lines 101 and 201. (HUD-1)

    I don't see any special circumstances for CA.

    Not saying you didn't find an inept closing agent, but how do they know what was agreed to without a contract? How do they know there are no required adjustments required for the HUD or tax requirements.

    I've only done a few hundred closings, completing the HUD-1 and closing the transaction between a buyer and seller. A refinance is obviously different.

    In a commercial transaction a HUD-1 is not required however, an accounting of the price and financial aspects must be shown generally giving the same accountings of that transaction. Source documents are needed to show and justify all entries on any settlement statement, documents are to be retained for three years as well.

    I would be suspect to any closed sale transaction accomplished without a sale contract, that being so unconventional I can only think of the justifications for not providing a contract would be to withhold details of the transaction. :)

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    10% of the nation is made up of Californians, and I don't think I'm going out on a limb by saying that perhaps considerably more than 10% of RE transactions take place in California.

    The OP is in So Cal. I've closed 200+ escrows (purchase, sale, refi) in my name or my corp name in California. Doesn't mean I know anything about closings in other states. Hence I wouldn't offer specific advice for closings in MO.

    Escrow instructions in CA are binding on both parties and supersede a purchase agreement unless stated otherwise. I doubt Chicago Title is going out on any legal limb to prepare escrow instructions and act on them once they are signed by all parties.

    As for the suggestion that there is something to hide when foregoing a purchase agreement??? The price and terms and conditions of the sale in the instructions can be anything the parties agree to, exactly the same as a purchase agreement. I can send a seller my simple 3-page PA, have them sign and send it on directly to escrow, who will then use that text to generate instructions. Or I can call my escrow agent who will put the exact text of my PA in the escrow instructions and send it out directly to the seller. What's the difference, except a saving a few days in mailing time?

    More complicated terms, and I've done plenty of deals where complicated would be an understatement, are best served by a purchase agreement.

    1Reply
  • Bill Jones
    Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
    12y

    Ms Poe your absolutely correct... 90% of my deals are escrow instructions only... Mostly unlisted seller carries

    0Reply
  • Bill Jones
    Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
    12y

    People that don't understand contract law, especially those outside of California... Can't think outside of the box when it comes to real estate

    0Reply
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