can buyer’s debt to seller be used as DP? - Posted by marla (SDCA)
Posted by marla (SDCA) on May 09, 2000 at 10:39:58:
A friend of mine (Sally) has rehabbed her PR and wants to sell it herself, 'though she’d cooperate with a Realtor if she could still get what she needs ($115K) out of the sale. Sally says the house will appraise for ~$156k. She owns the house, out right, but owes a friend (Mike) ~ $30K, $10-12K of which she used for supplies and appliances in remodeling the kitchen and adding a bath.
Mike has lived with Sally for much of the past year or so and Mike really feels the place is his home, but has been too intimidated by the thought of home ownership to have done anything about purchasing it, himself. (He’s known since he moved in that selling was Sally’s intent.) Now that Sally has actually put the property on the market and there are other interested buyers, Mike is finally trying to buy the property. But, by now, Sally’s in a hurry to get cashed out, pay off her debt to Mike and move on. Mike has no cash for a DP ('though he has lots of toys he COULD sell toward one), is self-employed and has good credit.
Mike has suggested the following …
Sally puts Mike on the title and they refinance with Mike on the new loan. They’d use Mike’s good credit and ok income, Sally’s good credit and the equity in the property to get 80% LTV loan. ('though he may qualify for more, Mike doesn’t want to take on more than the ~ $125K loan.) The ~$31K equity would satisfy Sally’s debt to Mike, but he wants her to pay him an additional $10K out of escrow, so that he can clear up his CC debt and have a little cash reserve. For this $10K, he’s willing to have her retain “controlling interest” in the property, because “he trusts her manage the asset more than he trusts himself.” (I think that his desire that she remain in the house with him has a LOT to do with it.)
Sally’s inclined to go along with Mike’s suggestion because the property’s in an upswing neighborhood in a good market and zoned for an additional SFR, so she sees the potential for additional profit down the road.
I see several pitfalls with the above scenario and suggest that if Sally wants to sell the house to Mike that she not actually partner with him on the deal.
We’re looking for suggestions for how Sally could sell the house to Mike, giving him credit for the $30K she owes him as the DP. (He’ll be on his own for the cc debt and cash reserve.) If she were to seller-finance the deal, would there be enough in the deal for someone to buy the note at closing and still leave Sally with $115K?
TIA for any help you can offer!
Note: Sally realizes that if she sells to someone else, she probably won’t have to go through many hoops; out of friendship, she’d like to enable Mike to buy into what would be a really good deal for him. (there are features to the property that are more important to Mike than to other potential buyers.)