A Note with an Option to Purchase

3 Replies

Hey BP Fam,

I have been working with a motivated seller for about two months now trying to make something happen. He needs the money for another business venture and his business partner is putting pressure on him to make a decision. It’s not enough spread to wholesale but its still a good deal as a rental.

The problem: He has a mortgage of 20k. He is willing to do owner financing but he needs cash. So I would have to pretty much purchase for his asking price of 45k (or make a down payment in excess of 20k) so he can walk away with some money to fund the next business venture. I can not get traditional financing, the purchase price is too low for lenders that lend based on property dti, and I am not willing to give him more than 15k down.

The solution: Create a 2nd position note for 15k and a option to purchase in a year or two at 45k with principal and interest as a down payment. Is this feasible? If so, what paperwork is needed? Has anyone done it? How was your experience?

Thanks in advance for any feedback you guys can provide.

Sincerely,

E. Harris

Baltimore, Maryland

Don't do that unless you have excess cash to keep investing and you make money writing loans. If you have to foreclose you would need the cash to pay off the first mortgage assuming the first mortgage holder bids which is a 99.9% certainty. You could do what I suggested above then turn around and have him lease the property back from you with him having a option to purchase it back.