Buy on contract to sell on contract?

Question

I suppose, from a certain perspective this is sort of straw buying, but in a way I thought it might pertain to wholesaling as well...sort of.

So, I've got an individual that has been renting their entire life and decides theyre ready to buy a home, but they're looking to buy on contract with a lump sum down and then a certain budget each month.

I've also got an individual wanting to sell a house locally and is willing to sell on contract.  My initial thought is to just bring them together and request a small commission, but there's also this thoughts that if I play my cards correctly I might be able to buy the house on contract myself for $60,000 and then turn around and contract the house out the interested party with a point higher interest and slightly longer term.  I haven't specifically crunched the numbers, but just wanted to get some opinions.

For instance, say I can get the house with $5000 and 20 years at 5% and I could go essentially take the buyers $5000 and then go 25 years at 7%.

Another thought is to just do a rent to own type of contract.  Anyways, these are my thoughts and wanted some input.  Anyone ever done this?  Any benefits to sell on contracting and slightly lowering cash flow by offering a longer term so that ultimately potential interest justifies it.

Would appreciation any feedback.

Bill Gulley · Answer

Selling to an owner occupant, not an investor, you'll be in violation of several federal laws as you proposed the transaction/

If you "stay in" some installment purchase, you can only sell the interest you hold, to a less degree, in other words, if you don't hold title buying on an installment contract, you could lease it and grant an option to buy, you can't sell on a sub-2 basis as you don't own it.

If you assign an installment contract, you must have the original seller's consent, you can't create an assumption of a unilateral contract without consent.

Adding interest, unless you have an MBA in finance and knowledge of applicable laws, I guarantee you will not be in compliance with federal laws, it isn't that simple, especially for an owner occupant requiring TILA disclosures.

Do some reading in the finance forums here, financing has changed and it's not the Wild West anymore. Not only should new investors not attempt to get creative but there are mortgage folks that aren't qualified to do what you're suggesting!

Your expected profit is reasonable, you can buy as an investor with an installment contract without issue. The issues come in with your sale. If you are exempt from Dodd-Frank, you may proceed without a RMLO, and lease with an option. You need to understand the issues of financed options and crediting lease payments toward a purchase price.

Be aware of draw backs, if your buyer gives notice to close the purchase and your seller skips out, what are you going to do? Then there is the due on sale clause. How will you manage insurance matters, losses and disbursement through your position? He who pays the taxes gets the deduction, generally speaking. How are you going to administer contracting for repairs or improvements, building permits may require the owner of record, in title to obtain permits. Are you aware of servicing requirements, accounting, notices, tax filings and collections, financed transactions, your origination of the deal may be exempt from federal law, your servicing blunders may not be.

If you go there, best way would be to buy using a note and deed of trust or mortgage and take title, or, buy it Sub-2 and finance it being in title. Then you can sell on an installment agreement as the seller, not stacking the financing. But frankly, this is pretty risky and you'll suffer more brain damage than would be worth $5,000.00! Not nearly enough of a spread for a drawn out transaction, IMO.

Best deal, get an option, assign the option, collect a fee, step out of the deal and have the owner sell to the buyer. There should be no issue at all with your fee as it is very reasonable, so them knowing shouldn't be a problem! :)

Landon Elscott · Answer

I appreciate the replies, including the PMs I received.

I think in the back of my mind, I knew it wasn't going to be that easy, but you never know until you ask questions...

Beyond just the complexity of the situation, regardless of the risks, the other problem I foresee is that the "predatory" nature that might be construed from this could shine a negative light on my real estate rental business as a whole.  Certainly, I'd love to find addition streams of income and intriguing ways to make money, but the more I consider this the more I think I don't want to sacrifice a reputation I'm looking to achieve as a fair, just and ultimately profitable landlord because I was trying to pull off some sort of loan sharking scheme...so I think I'll just look into simpler options for getting a kick back in there.

The company that owns the property, while initially I thought was just considering contract selling, actually looks to be focused on contract selling only.  Once I looked more into their terms, they were only offering reasonable terms for owner occupied and basically set the interest charges too high for investor contracts to make it reasonable...it appears their whole business is just contracting out to subprime borrowers.

Jade Davis · Answer

If you plan to buy it, I believe you need to have the cash reserve to do so. You could just do an asignee contract however then you'll be disclosing to both the buyer and seller what your profit will be.