Is this feasible? So confused! So need help! - Posted by jetlex

Posted by John on March 26, 2006 at 09:02:28:

Yes get an attorney to write up the note and mortgage or (deed of trust) and get the title company or closing agentthat closes the deal to handle the rest.
Now that done, If the buyer fails to pay the first they by law have to notify you and you have the option of bringing the 1st current and foreclosing on your 2nd and taking the first and the property. Check with your attorney for details about your options as they are state specfic. The only way you would be wiped out is by failure to act when notified. However you could sell your second after some seasoning for a discount depending on how the note is set up. Document preperation fees can be passed to buyer at closing.

Is this feasible? So confused! So need help! - Posted by jetlex

Posted by jetlex on March 24, 2006 at 22:22:40:

Thank you in advance for reading this!

Here’s the situation:

I have a rental property that I am selling for $309,500 and will offer L/O. It’s 100% financed with 1st mortgage (7/1ARM) @ $221,500 and 2nd (HELOC) @ $55,300.

A potential buyer is qualified for only $228K but wants me to carry the 2nd and asked to lower my asking monthly payment since she’s giving me $228K upfront. That way she can afford to pay me and her lender.

Here are the questions:

  1. I was told that the only time I can offer owner financing is if I have an assumable loan or if I owned the property free and clear. Is this true? 7/1 ARM is assumable after the 7th year, I was told.

  2. If I use the $228K to pay of my 1st. My 2nd mortgage then moves to 1st lien and the buyer’s lender will have to take the 2nd lien position which I doubt they’d do since they have $228K at stake where I’d only owe $55K with my lender. Would lenders be willing to switch lien positions in this case?

  3. I can pay off the 2nd with my condo equity and have the buyer pay off my 1st with her $228K so the property would be free and clear. This way, the buyers lender will be in the 1st lien position.

  4. In any of the above cases, who holds the title? And what happens to the deed?

I don’t want to get caught up in a situation where I relinguish all control for a partial payment when the asking price is $324K. Please help.

Re: Is this feasible? So confused! So need help! - Posted by Rich

Posted by Rich on March 25, 2006 at 10:56:48:

I like the suggestion of substituting collateral and moving the HELOC to another property.

However asa rule the only “seller financing” you can do is from the equity you own free and clear. So you can’t offer seller financing for any amount of equity still under lien to the bank.

Personally, the only way I would offer seller financing is if I was in the 1st position. Especially in this case where it looks like the buyer does not really qualify for the property and you risk having to foreclose just to maintain the equity you put on the line so the buyer could complete the sale. In carrying seller financing you really should do all the background work done by an institutional lender such as credit reports, income verification and so on. Unless you have a burning urge to unload the property for some reason (like someone who sold me a property with a non-paying renter in place), then the purpose of an investment is to make gains and try and protect yourself from losses.

The further away from 1st position you are, the more likely you will be the one eating the loss if the buyer really can’t make the payments. I wouldn’t do it.

Re: Is this feasible? So confused! So need help! - Posted by Natalie-VA

Posted by Natalie-VA on March 25, 2006 at 10:40:46:

Jetlex,

It sounds like your buyer just can’t afford this place. Whether you sell it on lease option, owner financed, or a straight sale, it doesn’t sound they can do it.

If the buyer is getting a new loan, most likely, their lender will not allow you to hold a 2nd for that large an amount. Even if you do hold a 2nd, it sounds like a pretty risky 2nd to hold.

I would find another buyer.

–Natalie

Re: Is this feasible? So confused! So need help! - Posted by John

Posted by John on March 25, 2006 at 06:48:14:

JUst a thought here. Did you think about having the HELOC just moved to the condo. (Substution of collateral) This leaves you with a 221K 1st to be paid off at closing and the you would carry a second of 96K. The Buyer would hold title with 2 leins a 228K 1st and your 96K 2nd

Re: Is this feasible? So confused! So need help! - Posted by jetlex

Posted by jetlex on March 25, 2006 at 23:41:17:

So, it’s against the law to offer seller financing for an amount that is under lien to the bank? I didn’t realize that those who offer rent to own most likely own it free and clear. You’re right…now that I have everyone’s perspective, it does seem like a desperate move if I accept it. Plus, if she defaults, I may not collect all that is owed to me if the 1st lien holder collects the loan amount plus all the late fees and penalties.

Re: Is this feasible? So confused! So need help! - Posted by jetlex

Posted by jetlex on March 25, 2006 at 23:48:40:

This might be a dumb question, but if the property is valued at an amount that would cover both, why would the buyer’s lender oppose to my carrying the 2nd of Sales price-$228K? In this case, if she defaults, wouldn’t her lender be the 1st in line to collect their portion of the pie and I get whatever is leftover if there was any?

You’re absolutely right about this being too risky. Afterall, for her to not fully qualify due to her not-so-great credit, there’s a change that she CAN default and if it forecloses and the 1st lien-holder collects $228K + late fees and penalties, I may have nothing left to collect.

Re: Is this feasible? So confused! So need help! - Posted by jetlex

Posted by jetlex on March 25, 2006 at 23:55:51:

You’re right, that would be the easiest way. But after getting additional feedback, it might not be such a good idea to allow a person who can’t qualify for the full price tag of the home due to her not-so-great credit. If she default and goes to foreclosure, I might not get anything if the 1st lien-holding collect the 228K on top of late fees and penalties.

Question: in situations like the one you mentioned where the owner finances the second, do you hire a RE attorney to process the necessary paperwork so that record show I’m the 2nd lien-holder? Thanks for your feedback, John. I really appreciate it!

Re: Is this feasible? So confused! So need help! - Posted by Rich

Posted by Rich on March 25, 2006 at 23:47:53:

What you would be essentiallydoing if you offered financing for the amount under the 1st is lending money on the same asset twice. Like selling the same seat at a ball game to two different people.

That is where “Subject to” or Sub 2 financial arrangements come in. This is where the purchase leaves existing financing in place as a pass through for the buyer. Fact is this violates the DOS clause (there are those who claim it won’t but they are actually relying on the bank not finding out about or taking action on the contract violation rather than it actually being OK with most lenders).

For me, I would prefer to collect the payments for the 1st and send them in so I don’t discover I am being foreclosed because they weren’t paying the lender. This is because with a Subject To arrangement its still your name and credit rating on the note, not the “buyer”.

Re: Is this feasible? So confused! So need help! - Posted by Natalie-VA

Posted by Natalie-VA on March 26, 2006 at 09:10:38:

Jetlex,

Not a dumb question. The lender doesn’t just look at the loan to value (LTV), they also look at the Buyer’s debt to income ratio. That second would put the Buyer into higher monthly payments which will increase his chances of default.

–Natalie