Investors Lounge Online

There are different ways to structure real estate transactions that involve seller financing to benefit all parties.  Of course the seller has concerns of protecting their property and the need for regular repayment.  The following scenario explores this option in detail.

You know that your local market has many rental properties in the inventory and you have found one that meets your needs.  You will be purchasing from a seller who is greatly motivated because the property has been on the market longer than a year.  The property has an existing long-term fixed rate first mortgage with a balance of just $100,000.  Your plan is to buy the property, rent it out and hold onto it as a long-term return on investment property.  You know that the home is worth about $150,000 and the seller has it priced at a discount of $120,000.

The offer is as follows.  You want to put $5,000 in cash as a down payment but also allow the seller to keep the title in their name with their first mortgage with only a balance of $100,000.  The seller must also consent to taking a second lien loan for the remaining $15,000.  This transaction may seem like it only benefits the buyer and the seller is left with all the risk.  However due to the current lack of home sales in your area, the seller is motivated to continue the arrangement of the sales price, your down payment amount, and also is okay with you taking over the monthly payment for the first lien mortgage because they want to see the property sold in the long run.  What bothers most sellers about this type of transaction and what makes it risky for them is that you are not assuming the existing loan.  It still remains in their name but the title work protects them for your default.  Still there is the concern of the loan remaining in their name and the $15,000 second lien is also risky for them should you fall into hard times but the goal of the sold property remains a common interest for all parties.

With the housing market in its current state, you may see more and more "wrap" mortgages come into play as real estate transactions become tougher to complete due to the subprime sector closing down.  Wrap mortgages act as a secure device where the seller agrees to finance the sale of their property by literally "wrapping" their existing mortgage around that of the potential of a solid buyer.  It is all a matter of presentation.  A smart buyer will "sell" up the pros on the scenario to the seller by marketing it as such with the following.

You make monthly installment payments to the seller on a $115,000 promissory note secured by a purchase money wraparound mortgage that will encircle their existing $100,000 bank first lien mortgage.

The seller will collect the payments from you on the $115,000 wraparound note and then in turn make the payments they are still obligated to pay on their existing $100,000 bank debt while retaining the difference. With this new proposal the sellers realize that they are in far better control of the financing and in protecting their equity.

It takes the pressure off them to make the monthly payment because you will be paying their mortgage for them via a secured promissory note and contractual agreement, which wraps their existing mortgage in a sense of protection.

It is almost like renting a property except there is the reward of knowing that you will own it someday. It is a long the same lines as option to buy.  The seller will collect the money for the mortgage payment and then make the payments themselves.  Usually this means that not only are you paying the amount for the mortgage but also a little extra for taxes and other house expenses.  This puts the seller in greater control of what happens to their finances and allows them to build equity.  Actually the buyer builds equity as well. If there is a failure to pay the monthly payments as promised, then the seller knows that you are not a viable candidate for such an agreement.