ONWER FINANCING ANALYSIS

Let's see if I can answer some of those questions.

The thing is in this wonderful Real Estate world, nothing is every set in stone. So a lot of terms are just negotiable.... Most of your questions fall under that category but I'll give it a shot!

1.If the owner does FULL seller financing and seller has a mortgage what happens?

See that's the crazy thing is that everything is negotiable! Generally, though, in this situation the seller would finance and you would make at least the minimum payment on the mortgage. OR if the mortgage was assumable, we could just check with the bank and see if you can take over the mortgage, cutting out the middle man. If I were the seller, I'd make you pay the minimum mortgage, plus a little interest so I'd get a little cash flow from it before the big payoff.

2.Are the original mortgage terms passed on to the BUYER?

Only if you guys agree to it or you assume the mortgage... generally I think all you have to worry about is making that minimum payment, which is the mortgage payment.

3.Is the owner expected to INPUT SOME INTEREST on top of the existing mortgage terms?

Sometimes. Depends on how motivated the seller is. If he just wants out you can agree to just take over the mortgage through owner financing or assume it. Generally you can agree to the interest to make the deal a little sweeter to them if they are a little hesitant.

4.How does the flow of money (monthly mortgage payment) work?

I'm assuming you mean the money you pay the owner. It depends on how you set it up. You might want to agree on an escrow account so everyone gets paid, in fact I'd recommend that. Because generally you give the funds to the owner who, in turns, pays the mortgage. But if he doesn't pay the mortgage the house is in danger of foreclosure. I believe you can setup the escrow to pay the mortgage every month (someone verify please). If you feel you can REALLY trust the seller, you could just keep receipts and go from there. I wouldn't recommend it either way though, do it right safe. Go with the escrow and run your numbers to fit the fee in.

5.What is the best exit strategy for owner financing?

Depends on how you set it up in the contract, funny I keep saying that but it's true! First I'd say before you pay ANYTHING make it all contingent upon inspection of the home. Because after you pay your stuck. HOWEVER you can put a clause in saying that if you default on the payments that you lose all funds invested and the owner retains the deed. Your best bet is to write up a Lease Option or a Subject To contract and then just insert some exit clause

I hope this answered some of your questions, a lot of what you said is just negotiable between you and the seller.

Oh and don't forget the last two numbers on your questions aren't right....

Knowledge is Power
- Pimpedoutgeese

Thanks much for your reply, believe it or not- it's just me being stupid, i got more confused...

1. 1.If the owner does FULL seller financing and seller has a mortgage what happens?

See that's the crazy thing is that everything is negotiable! Generally, though, in this situation the seller would finance and you would make at least the minimum payment on the mortgage. -- MINIMUM PAYMENT ON THE MORTGAGE MEANING WHAT THEY ARE CURRENTLY PAYING IN MONTHLY MORTAGAGE, CORRECT?

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ALSO READ THIS PART ON A SEPARATE ARTICLE ON OWNER FINANCING, IS THIS TRUE?
But if the seller wants to owner-finance to you, then s/he'll have to pay off the existing mortgage first. Does the seller have a spare $110,000 lying around? Probably not. So in most cases, sellers can't owner-finance to you even if they wanted to, because they don't have the means to pay off their existing mortgage.
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OR if the mortgage was assumable, we could just check with the bank and see if you can take over the mortgage, cutting out the middle man. -- DOES THIS MEAN I HAVE TO GO TO CONVENTIONAL BANK APPROVAL?

If I were the seller, I'd make you pay the minimum mortgage, plus a little interest so I'd get a little cash flow from it before the big payoff. -- BIG PAY OFF IS WHEN I SELL OR REFINANCE THE PROPERTY AND SELLER GETS PAID?

2.Are the original mortgage terms passed on to the BUYER?

Only if you guys agree to it or you assume the mortgage... generally I think all you have to worry about is making that minimum payment, which is the mortgage payment -- UNDERSTOOD, IF THE MORTGAGE TERMS THAT THEY HAVE CURRENTLY IN PLACE DONT APPEAL TO ME, BECAUSE OF HIGH INTEREST RATES AND ADJUSTABLE MORTGAGE RATES -- CAN I ASK FOR THEM TO RE MODIFY THE LOAN BEFORE I PROCEED WITH THE DEAL?

3.Is the owner expected to INPUT SOME INTEREST on top of the existing mortgage terms?

Sometimes. Depends on how motivated the seller is. If he just wants out you can agree to just take over the mortgage through owner financing or assume it. Generally you can agree to the interest to make the deal a little sweeter to them if they are a little hesitant. -- ASSUME MEANING I GET A MORTGAGE FOR THE PROPERTY?

4.What is the best exit strategy for owner financing?

Depends on how you set it up in the contract, funny I keep saying that but it's true! First I'd say before you pay ANYTHING make it all contingent upon inspection of the home. Because after you pay your stuck. HOWEVER you can put a clause in saying that if you default on the payments that you lose all funds invested and the owner retains the deed. Your best bet is to write up a Lease Option or a Subject To contract and then just insert some exit clause --

LEASE OPTION TO OR SUBJECT TO? IN OWNER FINANCING,
1. I HOLD THE TITLE, THE OWNER HOLDS A NOTE
2. I PAY OFF THE MORTGAGE TO THE SELLER AND SELLER REMITS TO BANK
3. WHEN I EXIT , SELL OR RE FINANCE, OWNER GETS PAID AND I GET PAID ON PROFIT FROM NEW SALE

CORRECT? Appreciate the kindness to help

PHEW!!!!

Let me break all that down and take a look...

1. First off if they agree, it doesn't matter if they have a mortgage or not, heck most owner financing that goes on the banks don't even know about! A smart seller that owner finances inputs the mortgage amount into the amount they will charge you monthly. And you are correct, if they have a mortgage chances are your minimum payment will be whatever there mortgage is... but doesn't that make sense? If you were selling a house that still has a mortgage, and your financing it and you want out of the house, wouldn't you make sure the buyers payments would cover the mortgage? As far as the assumable mortgage I believe you would have to run a credit check(anyone correct me if Im wrong) But this option is pretty much gone with the wind nowadays... Most mortgages aren't assumable anymore BUT you never know until you check.

2. Generally you won't even need to KNOW any of his mortgage terms if he finances, unless you want your minimum payment to be smaller, but chances are its too much hassle to mess with. He'll just give you a set amount that you would have to pay if you want to buy the house... Now you can still negotiate on the price before you sign the contract but I'm pretty sure the amount won't go any lower then the minimum payment of his mortgage, if he has one. If your assuming it, you might be able to Mod as you assume the mortgage (verify?). If not that would be the case of having them mod before you assume it, but then again, if they could have done it themselves to save the house, then they probably would have done it already to lower there payment.

3. lol Yea I should have worded that differently. I mean assuming his mortgage which u would KINDA be getting your own mortgage but your essentially just taking over his and whatever is left on it.

4. LEASE OPTION TO OR SUBJECT TO? IN OWNER FINANCING,
1. I HOLD THE TITLE, THE OWNER HOLDS A NOTE
2. I PAY OFF THE MORTGAGE TO THE SELLER AND SELLER REMITS TO BANK
3. WHEN I EXIT , SELL OR RE FINANCE, OWNER GETS PAID AND I GET PAID ON
PROFIT FROM NEW SALE

That's about how I'd write it up, I hold the title the owner holds the note... That basically gives you the option of refi the home or sell whichever you decide.

If he has a mortgage and he is owner financing, the burden is still ON HIM to pay the mortgage, so its not set in stone that he pays the mortgage with the payments you give him, and if he doesn't your screwed out the home, thats why I recommend escrow.

If you use an exit clause other then what you plan to turn a profit your going to lose whatever you invested into the property after the contract was signed... GENERALLY... I don't see anyone agreeing to it otherwise. If you sell or refi then yea pay off the owner whatever is left that you owe him and take your profit

YOUR ALMOST THERE KEEP GOING!!!!

Knowledge is Power
- Pimpedoutgeese

What you are talking about is a Wrap Around Mortgage where the owner is making the payments under an existing mortgage. You would make payments to the owner or an escrow company, and a portion or all of your payment would be applied to the existing mortgage. Dean's book explains this very well. He also explains the best way to set it up. I suggest you review that chapter.

Al

I would like to clear up a few things in here. First off the only loans that are assumable are FHA, and you would have to qualify to take over that loan and meet the FHA guidelines (FHA does not lend on investment properties).

When doing a lease option or a wrap around mortgage where there is an underlying mortgage on the propety I would set up an escrow account that I pay my monthly payment to. They would then pay the mortgage directly and any money left over would go to the original seller. That would ensure your payment is going where is belongs to pay off the original mortgage. It may cost you a few extra bucks a month but would be well worth it.

Thanks for the clear up you guys!!! I knew there were right terms, but I wasn't too sure what they were so I just used a generic way to express it.

alchristmann:

Geez, I need to crack open my book again, which chapter is that again? Which book first hee hee

eroberts:

Thanks for the clear up on the Assumable mortgages! Awesome!! Just what I'd expect from a coach!

I learned some stuff too guys, again thanks!

I hope I was helpful, Daynah!!

Knowledge is Power
- Pimpedoutgeese

Daynah,

Please visit my website Fullwood's Note Mall there is an article education on Seller Financing. I also have where you can also signup for newsletter on this subject. The more important procedure is to discuss this Seller Financing with your Attorney and Accountant.

Good Luck,
Jacqueline Smith

INDEED VERY HELPFUL, THANK YOU VERY MUCH.

GUYS, I STILL NEED SOME INPUTS PLEASE.

I hope I was helpful, Daynah!!

Knowledge is Power
- Pimpedoutgeese[/quote]

So here is the scenario:

Seller wants to owner finance 20% for 2 years on a $350,000 sale price. The property is NOT FREE AND CLEAR , and he has a mortgage:

A. He is financing $70,000 and can input any interest rate he wants? --CORRECT?

B. For the remainder of the sale price, I can either assume (using FHA and go through traditional lending, WHICH NOT SOMETGHING THAT I PREFER TO DO) -- CORRECT?

c. IS THERE ANY OTHER CREATIVE MEANS TO DO THE TRANSACTION - Hard money?

Ideas anyone?

NOTED:

For the remainder of the sale price, I can either assume (using FHA and go through traditional lending, WHICH NOT SOMETGHING THAT I PREFER TO DO) -- CORRECT? --

NOW CORRECTING MYSELF-- I CANT DO THIS, BECAUSE THIS IS AN INVESTMENT PROPERTY

The 20% seller financing keep for 2 years, seller can get a 2nd mortgage of 80% at a non traditonal/conventional bank.

Seller Financing both seller and buyer negotiate on a price, rate term etc and have an Attorney and Accountant do the paperwork.

Hope this help,
Jacqui

Seller Financing Can Only Be Used When Someone Owns a Property Free & Clear

Yes, it is simplest when there is a large equity position in the property, but even someone who has a large mortgage can use the Installment Sale effectively if they’ve got good underlying financing.

One of the bonuses of the last real estate cycle is the preponderance of amazing financing in place. Many people were able to avail themselves of 30-year fixed rates at 6% or better! So, let’s say your client has a large, but nice 30-year fixed at 5.5%, what are the possibilities?

He wants to sell for top dollar, but there’s a lot of competition out there, and not many buyers able to qualify for the loan they’d need. His property is just sitting on the market, and he doesn’t want to drop the price. As his listing agent he’s thinking that you’re not doing your job to market his property, and he’s waiting or the listing to expire. What could you do?

What if you were able to inform him that to get his price, he could offer to finance the sale of his property? If he’s stuck on price, then have him consider terms. But how could he? He doesn’t have that much equity. Here’s how:

Sales price Seller wants: $500,000
Underlying financing: $400,000
Interest rate: 5.5%
Seller’s monthly payment: $2,271.16

Sales price Buyer agrees to: $500,000
10% Down payment: $50,000
Seller wraps his loan/AITD: $450,000
Interest rate: 7%
Buyer’s monthly payment: $2,993.86

The Seller not only gets his price, he makes a spread on the bank’s money! He gets enough of a cash down payment to more than cover closing costs, and he pockets $722.70 per month for the next several years. Offering terms got a lot more buyers looking at his property, and he was the first in his neighborhood to get into escrow.

The Buyer is happy because he doesn’t have to try and qualify for bank financing, the escrow closes quickly, and there are no points or origination fees to pay. And you’re happy, because you got paid!

What about when the seller has absolutely no equity?

In that case, advertise Owner Will Carry, Low Down and Take Over My Payments. You can get paid by creating solutions, even if the buyer is simply taking over the seller’s payments. Many sellers these days are happy to leave their existing financing in place in exchange for the chance to unload and walk away.

But what about the infamous acceleration language in almost all loans? Isn’t it illegal to violate the “due-on-sale” clause? No, it’s not illegal. All it states is that the lender, at its discretion, has the right to call the loan due if the property is transferred.

In most instances, it is very unlikely that they are going to call a nicely performing loan. Right now the banks have enough trouble keeping up with the massive wave of non-performing assets on their books. Additionally, there are simple, perfectly legal measures that can be taken to minimize the risk that a due-on-sale clause will ever be triggered.

You will love this,
Jacqui'

When many real estate professionals think of Seller Financing, they think of having the Seller carry back a high-risk 2nd Deed of Trust. For a while, the 80-10-10 financing structure was popular. There would be a 10% cash down payment with an 80% bank financed first, and a 10% Seller financed second.

That can work well in an appreciating market, but even then, the Seller is basically holding a worthless instrument. That kind of a second has no market value. It could not be sold for instant cash without a large discount (if at all). It the Buyer decided to quit making their payments, it wouldn’t be economically feasible to foreclose and repossess the property.

Keeping a huge defaulting first current to protect a small second usually doesn’t make sense. The exposure is just too great. The holder of a high-risk 2nd needs to sit back and keep their fingers crossed and hope that the payments keep coming in. So, yes . . . carrying back a small second is risky. Sometimes the risk is acceptable, sometimes it’s not. It all depends on the individual circumstances of the people involved.

If your seller wanted or needed to carry a second, it is usually better for them to structure something closer to a 50-30-20, or a 60-30-10 . . . a 10% - 20% cash down payment, with a seller financed second that is about 50% the value of the first. A 2-to-1 ratio is best in protecting the value of a second deed of trust. The first TD should usually be no more than 3 times the value of the second behind it.

Why? Because then your Seller has options. What if they need a lump sum of cash a year after the sale? If they’ve got a high-risk 2nd, then too bad . . . they can’t get it. But, if they’ve got a valuable, well-protected 2nd, then they can usually sell a portion of their 2nd for minimal discount and raise the cash they need, still have some monthly income, and defer capital gains to boot.

In the traditional sense, a low down payment (anything less than 10%) is considered risky. However, there are loads of buyers out there with only 3-5% down who still want to buy and would be good payers. Can these deals still be put together? Yes, and when we do, we use additional strategies to minimize the risk to the seller when he accepts a low down payment.

From: Jacqui

Jacqui, you are an angel to have enlightened me with all of these. Although really very new to all of these, will try to analyze as much as I could and hopefully get a better grip at things.

I just remember wendypatton.com have an excellent site on this subject too. Sorry for the late
Jacqui