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Author: Jeff Breglio (3 articles found) - Clear Search

3 Keys to Seller-Financing: Key #1 Part 3: What kind of deal is it?

Utah Real Estate Investors Association

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Last week we talked about traditional seller-financing scenarios. In those cases, the buyer actually bought and owned the property while the seller became a lender. Lease options are the exact opposite. The seller retains ownership of the property and become a landlord.

Firstly, sellers will need to be comfortable with becoming a landlord. But once that hurdle is overcome, these are great deals. It starts with the seller signing a master lease with the investor. A master lease is one where the tenant (in this case, the investor) can “sub-lease” the property to a standard tenant in a standard lease who will actually occupy the home. Normally, there is a spread in the monthly rent where the investor is making some cash flow.

This takes responsibility for maintaining the property off the hands of the seller, which is the reason most sellers go for this deal. It also provides some cash flow to them, and may defer taxes in some situations.

The second half of this deal is the option to purchase. The option agreement gives the investor the right, through an option fee, to purchase the home sometime in the future. This can lock down a good price in an appreciating market.

A lease option “sandwich” is a deal where once the investor has a master lease and option, he then subleases the property and assigns the option agreement to the tenant/future buyer. Often the investor collects a bigger option fee than he paid to the seller, so he gets cash now in addition to the rent cash flow.
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3 Keys to Seller-Financing: Key #1 Part 2: What kind of deal is it?

Utah Real Estate Investors Association

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Last week we discussed a situation in which an investor partners with the seller on the project, which is one way to have the seller help “finance” the deal. In this blog, I’m going to explain what I call “Traditional” seller-financing because it’s the more common way to structure seller-financing deals.

 Traditional seller-financing is any situation where the investor actually buys the house and takes ownership through a closing. Then, in some way, the seller is helping to finance that purchase. I break traditional seller-financing into 3 sub-categories. Note: These descriptions are how I speak about them. Other investors may use different terminology. I separate them because, structurally, they are different.

The important point to distinguish traditional seller-financing from the others is that the buyer will actually own the property! And, anytime a mortgage is staying in place, there will be due on sale clause risks.

  • True Seller-Financing: This is a deal in which the seller owns the property outright with no mortgage. In this situation, the seller simply becomes a bank and “carries” a note and deed (mortgage) by exchanging his equity for the promissory note. The money doesn’t change hands as it’s all on paper. The seller earns some extra money on the interest. The investor gets a better rate than other lenders. All you need is a good contract and then a good note and trust deed. Since there is no underlying mortgage, there is no due on sale clause issues.
  • Subject-to Seller-Financing: In this deal, there is an underlying mortgage that the investor is simply taking over. Think a loan assumption but without the bank’s involvement. The seller either has no equity or is cashed-out of her equity at closing. So, there is nothing left owing to her. The investor can obligate himself through the contract to make the monthly payments or through an all-inclusive note and deed (“AITD”) that mirrors the terms of the underlying mortgage. This AITD, while optional, is a cleaner way to structure this deal and provides the seller extra security that you’ll make the mortgage payment. The seller could foreclose on the AITD to take the property before the mortgage bank even finds out.
  • All-Inclusive or “Wrap” Seller-Financing: In this deal, the seller is financing an amount that is greater than the balance on the underlying mortgage. So, she’s helping finance some of her equity in the house. Because she is owed money after the closing, this deal always requires an all-inclusive note and deed or AITD. An AITD is a mortgage that “wraps” around the underlying one. So, let’s say the seller is financing $150,000 with an underlying mortgage balance of $135,000. The investor makes payment on the $150K note to the seller; and the seller makes the payment on the underlying mortgage payment, keeping the spread. At payoff of the AITD, the underlying mortgage must be paid off first (that’s the “wrap” part) and anything left over goes to the seller’s balance on the AITD.
You’ll see, that in each of the above three methods, the investor buys the house and the seller somehow “loans” money for part or all of the purchase. Next week we’ll cover the contract for deed.

For more information, please see my website link below!

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180
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3 Keys to Seller-Financing: Key #1 Part 1: What kind of deal is it?

Utah Real Estate Investors Association

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When we talk seller-financing, or “creative” financing, we are really talking about a very large number of ways to structure the deal. Each kind of deal is structured differently, has different documents, and has different risks involved. That’s why the first key to seller-financing is understanding all the different options and deciding which is the best route.

There are 4 major types of deal structures (and even these can be broken down). I categorize seller-financing the way I do based on a) who owns the property, b) what documents are needed and c) the risks involved.

Here are the 4 main seller-financing deal structures:

  1. Seller Partnering
  2. Traditional Seller-Financing, or Note & Deed Seller-Financing
  3. Lease Options
  4. Contract for Deed

One common element among all types of structures is the long-term arrangement with the seller of the property. In a typical purchase and sale, the seller sells the house outright at a closing and is never heard from again. But in these deals, you will have some “connection” with the seller that extends beyond the contract or closing—possible for decades. You need to understand that all of these deals are long-term partnerships with the seller. Understanding partnering in real estate is crucial.

The first structure, Seller Partnering, is any deal where the investor “partners” with the seller no differently than a partnership with another investor. This can take on any arrangement (other than the other 3). Normally, this will include a joint venture agreement with the seller. Here’s an example:
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