Question about this scenario: Seller has a duplex he wants to seller finance for around 200K. ARV 300K.
100% financing 4-5% he even floated interest only. But he owes 40K on his current mortgage. ($580 PITI with about 4 years left on it)
Duplex brings in $2400 total. 1200 a side. I want to keep it as a hold for myself.
How do I structure this? Do I do a subject to on the 40K as a 1st and seller finance the remainder as a 2nd mortgage?
Thanks in advance.
Hi @Jason Carter ! Yes, I'd take over payments on the $40K current mortgage and accept the seller's financing on the remaining $160K @ 4-5% interest only, for a purchase price of $200K. Seller's equity note would be in the second position.
Just be very mindful of your cash flow here! At 5%, your monthly debt service on the second will be $667. Throw in that first mortgage payment of $580 and you're looking at $1,247 in outflow and you'd still need to allow for vacancy, maintenance, and management.
I'd also want to dig deeper. Why is he selling for $100K below ARV? Is there a buttload of deferred maintenance you're going to get stuck with? What's his true motivation here?
Thanks a ton @Mitch Messer . I've posted this in a couple places and you explained it the best. Seller no longer wants to be a landlord. Just had kids, has a stressful, demanding job that he wants to keep. Wants the income and to lessen the tax burden without the headaches. We'll inspect the property before closing too.
@Jason Carter This is typically done as a “wrap mortgage”. Title passes to you, you execute a mtg for $200k to seller, he collects from you and he pays his underlying mtg. Either way you do it, use a serviced for the loan....that way both parties know the underlying mtg is paid out of your payments.
Thanks @Wayne Brooks . Does the servicer make the payments on his underlying mortgage? Or does the seller?
@Jason Carter The service, which is why it’s recommended.
Originally posted by @Jason Carter :
Do I do a subject to on the 40K as a 1st and seller finance the remainder as a 2nd mortgage?
Yes. That's exactly how I'd structure it. Someone mentioned a wrap before, but I would steer clear of going the wrap route if at all possible. It gives you the buyer more risk, and the seller way more protection. With him carrying a 2nd, his 2nd is at risk if the 1st wipes him out, which gives him motivation to keep paying on his 1st. You can also get servicer, but if you write it up that way with 3rd party doing the servicer, I'd get an MLO as well to protect your interests and make sure there's no underlying title issues, and he can be rest assured you have no credit issues. If you google "Call the underwriter" he's a really good one to use.
If he's willing to float 100% of the financing and sell for less than market, I'd double and triple check your numbers. A seller that doesn't want a buyer to have any skin the game is wanting to get out of a very bad situation. Make sure it's personal, not the property that is the underlying issue. Ask, ask and re-ask about their situation, finances, and what they're looking for out of the deal. Be the beat cop and interrogate to get to the bottom of the problems. Meet him at his place of residence. Ask the neighbors, ask if you can speak to the tenants. Get estoppel on the tenants to make sure they're leases agreement are what the seller claims. Ask for documentation on everything during inspection period.
If you want to really get creative, and he's willing to carry 100% of the financing, would he carry some of the closing costs if you roll that into the second? Worst he can say is no.. best case you just raise your CoC return into infinity. ;)
Awesome advice @Tim W. Thank you. We're asking a lot of questions right now but will dig deeper and never even thought of asking for closing costs! Appreciate it!