Calling javipa-I am a candidate for seller financing?

General Real Estate Investing
1

In searching around I ran across this post from 2010 from a member with an underwater home that he was looking to get out of by offering seller financing:

http://www.reiclub.com/forums/index.php?topic=48128.0

My situation is similar, but I don’t know how to structure it or if its even possible. Here are the details on the house:

The Good
-Located in Hunterdon County NJ in a desirable town/school district
-2 bed/1 bath
-Attached 1 car garage
-1/4 acre lot-fenced back yard
-Hardwood floors
-Central air, newer oil furnace/wood furnace
-30 year roof put on 7 years ago
-450 SF of finished space in basement, carpeted with built-ins
-Full perimeter foundation drains and two sump pumps (basement has never seen a drop of water)
-New gas stove, dishwasher, and laundry machines

The Bad
-Mortgage balance is about $222K @ 6.125% - House was appraised last month at $220K
-Current PITI is $2345/month
-$1495 Principle and interest
-$615 Property tax (Taxes are very high here)
-$60 Insurance
-$175 Private Mortgage Insurance
-Normal rent for my area on a 2 bed/1 bath is only about $1000 a month

Do I have options here? One thing to remember is that NJ was and continues to be hit very hard by foreclosures and there are presumably a lot of folks with damaged credit who are looking to buy again. The issue is can I offer an attractive enough deal?

2

OK, so you owe what the property is worth. Zero equity.

If the taxes are high everywhere, then this is just the cost of owning a house.
The interest rate is relatively high at 6.25%. So, no spread on payments is achievable. Sounds like a 12-year old loan?

All things being equal, and me not familiar with your market, this is what I think your options are:

Assumption:

  • You’re gonna babysit this turd for 5-10 years (just accept it)
  • You are not offering a bargain.
  • You are offering bargain terms. No credit check. No qualifying financing.

Objective:

  • Sell the financing.

  1. Characterize the house and pitch it to the buyers that want what it offers.
    ie: Big lot to park crap. Man-cave in basement. >> Newlywed/first time home buyer? A weird single guy that everyone thought was normal.

  2. Pitch non-qualifying financing as primary benefit.

  3. Add $20K as a financing premium; ask 8%-ish down; the balance due in 5-10 years, or less, depending on projected appreciation/inflation, or an appraisal, etc.

  4. You have no room to pad the payment, but you need to add $25 to the total payment to pay for loan servicing.

  5. You do not want the buyer paying you directly, plus you want 3rd party verification of payment history, tax reporting, etc.

That’s about it, except that I have no idea how fast the underlying mortgage is paying down, or how old it is. If the loan’s 10 years old, the amortization will have accelerated, and your equity position will increase accordingly.

FWIW

3
The interest rate is relatively high at 6.25%. So, no spread on payments is achievable. Sounds like a 12-year old loan?

Not quite, it will be seven years this June.

You're gonna babysit this turd for 5-10 years (just accept it)

That’s fine. I have $10K in the bank and good enough credit (680 FICO) for FHA/USDA financing. I don’t need to make any real money off of this, just get it off of my DTI so we can buy another home.

3) Add $20K as a financing premium; ask 8%-ish down; the balance due in 5-10 years, or less, depending on projected appreciation/inflation, or an appraisal, etc...

Sorry for the newbie question but what do you mean by “financing premium?” Would that be $20K on top of the 8% down? What should the purchase price be?

4

Yes, the $20K ‘financing premium’ is added to the retail value of the house (not the loan balance) as “EXTRA” profit for financing a buyer without qualifying, or a credit check. If he’s got the down you want, he qualifies.

The 8% down reduces the balance owed.

The purchase price would be the retail value, plus $20,000 (roughly 10% over retail).

5

OK got it-there’s just one problem left. Every broker I talk to says that the old mortgage will have to be factored into my DTI no matter what documentation I provide-HUD1, sales contract, etc… They would treat it like a rental with 12 months of seasoning required and then there are usually equity requirements on top of that. Care to send me the name of a good broker who works in NJ who can point me in the right direction?

6

“Every broker you’ve talked with?” How many is this? Keep looking. You haven’t found one that understands what you’re doing. He evidently thinks you’re “lease/optioning” your house, or something like that. Lease/Options have no resemblance to actually financing a buyer.

Meantime, if you list the buyer’s PITI+HOA payment on your loan app as “rent,” you are now committing a felony. At best, you can only show a note receivable in the amount of $225,000 with payments of “x.”

Meantime again, you’re NOT receiving any “rent.”

In fact, you’re only receiving the buyer’s interest on the remaining equity you’ve financed. That might be about $185/yr. Sure, you need to list that as additional taxable income, but you still cannot list your buyer’s PITI-HOA payment as “rent.”

In effect, you’re selling your house on a glorified A.I.T.D. (All Inclusive Trust Deed), using an Installment Contract. You’ve “wrapped” the underlying mortgage with your equity, and created one note receivable.

You may, or may not, have transferred title to the buyer (most likely yes, if this was a professional investor). If so, you can prove a sale with a copy of your Buyer’s Deed… If not, you still have the HUD1 Settlement Statement, and a copy the Installment Note …to prove a sale.

Bottom line: You don’t own the house anymore. You can’t “rent” it.

Meantime, I am certain that you are confusing the brokers.

Frankly, I’ve reached the end of my public advice quotient, and anything more would be legal advice, and I’m neither an attorney, nor do I pretend to be one here, without getting paid for it.

Find a better way to ask for a new loan, without explaining…

"I let some goof take over my loan without assuming it, and now I want to get a new home loan, without having my old payments show up as a liability, and how can I do that and make the bank feel like I'm a good credit risk, since I still have a loan on my credit, and I'm doing a sub2 deal, and my buyer didn't assume my loan, and I am holding his deed, sort of. Can you help me. Do you have any Kleenex?"

Just keep it simple. “I sold that house. Here’s proof.”

7

It just occurred to me to mention that ‘timing is everything.’

You can’t tell a lender that you “plan to sell the property,” and expect them to profile your dti any better. I mean anyone could tell the bank any old lie, if this were true.

You must have actually sold the property. It’s no wonder the broker is advising you the way he is.

If you’re attempting to finance a “new” house, BEFORE you sell the current one, you will have to qualify the way the broker suggested.

So, you’re gonna need to either bite the bullet, and sell the old house first, and then go look for new financing …or qualify for two loans at once.

The latter would simplify things dramatically, but so would having all cash.
:beer