I have some questions for people that know about owner financing in detail …
I have a home I am marketing with owner financing. It has a 1st Deed of Trust (DOT) for $67,550 and a 2nd DOT for $28,950 - for a total of $96,500 - both from the same lender. It has a FMV of $124-126k. My goal would be to ask for $5-10k down (minimum) and create 100% owner/seller financing for the balance of $125k at around 10-12% with a balloon due in 3-5 years. I’d also offer to take back a 2nd if the buyer gets conventional financing and pays off the two DOT’s in the process. Here are my questions …
I am in Texas, so I would need to create an All Inclusive Trust Deed (AITD), I’m pretty sure. From my understanding, this AITD would be placed in 3rd position. Is this correct?
How would I handle MY insurance? IOW, if I cancel the policy, my lender would see it (not that they would call the loan due, but you never know).
What happens if I do everything “right” and the lender still decides to call the loan due? It seems it would cause a very abrasive situation, since, technically, I don’t own the house anymore.
I plan to use a competent RE attorney to handle all the paperwork at least the first time, but I am just wondering beforehand. Thanks!
Remember, your insurance is also the bank’s insurance. If you cancel the policy the bank will take out force placed insurance to protect their interest. This is usually much more expensive than anything you might currently have.
As far as doing everything right if your bank has a DOSC in their note they have every right to accelerate the loan because you have transferred title without their written permission. Be prepared to refinance.
I assume the goal of the wrap around owner financing is to facilitate the sale of the property and/or create a spread between the rate you pay on the original loan and the rate you are earning on the wrap?
Remember, your insurance is also the bank’s insurance. If you cancel the policy the bank will take out force placed insurance to protect their interest. This is usually much more expensive than anything you might currently have.
Correct. So are you saying to keep MY insurance intact over the term of the buyer’s financing? IOW, if I have a 3 or 5 year balloon on the owner financing, I am supposed to keep paying MY insurance company for a policy that could be void?
As far as doing everything right if your bank has a DOSC in their note they have every right to accelerate the loan because you have transferred title without their written permission. Be prepared to refinance.
But how can I refinance when I am no longer the legal owner?
I assume the goal of the wrap around owner financing is to facilitate the sale of the property and/or create a spread between the rate you pay on the original loan and the rate you are earning on the wrap?
Correct. It’s a way to earn cash flow from the spread over a span of time. If the new owner refi’s, I still get money from the balance of the wrapped loan and the existing loan(s).
Let’s assume you sell the property with an owner wrap deed of trust. This would leave the first and second dot’s in place and thus you would be in third position. Similar to the requirement of your senior lien holder that you maintain adequate insurance on the property you could require the same of the new buyer. Being a mortgage/dot holder you have an insurable interest. This does raise questions about who to name on the insurance policy; buyer & senior lienholder? I would suggest asking your insurance agent how best to handle this. What about selling the property on a contract for deed where you maintain ownership until the contract is fulfilled?
i have found, that when you do wraps, creative financing deals, or transferring properties into entities, that most investors are taking big risk when it comes to insurance.
you see, when you buy a property (usually in your own name and not in an entity) many lenders will tell you to deed it into (or back into) your company after closing. the problem here is that when you do this (or in your case selling with owner finance), you would need to make sure your new buyer either gets his/her own policy with you and/or your entity also listed as named insured, or, you can add him/her to your existing policy.
here is the risky part…if you or your entity is listed as a loss payee, or as an additional insured, then (with many insurers), you will lose your section 2 coverage. this is the liability coverage. this is what we all are worried about. if jr. next door falls on the sidewalk (or if your tenant/buyer claims an injury…it has happened), then you will be left unprotected. you would still be covered in case of a fire, or vandalism, but not with a slip n fall, or something much worse. the insurance policy could also return your premiums, and NOT PAY THE CLAIM AT ALL, citing that you took on the policy, but were no longer the legal owner of the property, and then proceed to tell you that they had no obligation to the LLC or other entity you now have deeded the property into.
bottom line…however you handle the insurance question…call your agent or insurance company and make sure you and your entity is listed as a NAMED INSURED.
when i sell a home with owner financing in place, i always keep my policy in place (no problem with dosc) and add the tenant/buyer to my policy.
Well i have a question about buying a duplex under a land contract. i want to know if i’m able to have the seller convey the property into a trust so that if they acquire any debts, his creditors will not be able to apply any liens to the property. does anybody know if this works?