Seller Financing - Careful how you structure the pmts

General Real Estate Investing
1

A while back I bought a property using seller financing. Unlike today, I didn’t know what I was doing. I set it up so that I mail the check to the seller every month. Well I just sold the property (we close in two weeks). I called the seller that I bought it from so I could get the abstract. She told me that she owes more on her mortgage then I do. BIG NO NO. I let her know that she is not allowed to owe more then me. Now when I sell the property the seller I bought it from is going to have to come to the table with a few thousand. Lucky for me she will do it without a fight.

Lession:

  1. When doing seller financing never pay the seller. Either have a third party handle the mortgage pmts or set up an auto withdrawal from your bank account to her mortgage.
2

How did she end up owing more than you did? Wasn’t making payments or did it start out like that without your knowledge?

3

I bought it for $28,000. I just found out yesterday that she owed $27,000 at the time I bought it. I put $3,000 down at the closing table, so this is where the gap came from. You would think the Title Company would have seen that she owed $27,000 and I owed $25,000 (28,000-3,000 down pmt). To me this is a mistake by the closing company and the seller. They should have seen her mortgage and seen my mortgage and said “wait a second”. When I paid the Title Company the $3,000 they should have taken the down pmt and applied to her mortgage so she didn’t owe more then me. Instead they just gave her a check for $3,000.

4

You paid more for the property than the seller owed so I don’t see where the title company is at fault. Why her mortgage wasn’t satisfied at your closing is another question, unless of course you were doing some type of wrap mortgage and her lender didn’t enforce the DOSC. She simply has to manage her finances. You gave her $3k at closing so she should tuck that away in anticipation of having to payoff her mortgage. Certainly this was disclosed on your closing statement.

5

She didn’t sell it for more then she owed. The Title Company created a note for more then what was owed. That is where the Title Companies fault comes into play. She sold it for $28K and owed $27. This is why you go through a Title company. To avoid F#ck ups like this. I’m not sure how you think paying a Title Company to create a note that is all f#cked up is not their fault.

The purchase agreement was for $28K with $3K down using seller financing. So yes it was some type of wrap around mortgage.

I will have to check, but I don’t believe how much the seller owed was disclosed on any paperwork I received. The closing docs were very small, only a dozen pages at the most.

The seller knows she WILL be coming up with the money to correct this issue. The fault can be spread around, but dead or alive the seller knows she will be coming to the table with the money.

6

:cool HEY HEY IRON sounds like a bad deal about to get right ?? HOW have you been any way ??

I would have been very worried back and with few little closing papers >> you should have had a copy of the sellers in place loan papers AS well your loan papers with them !! AND a disclosure sheet listting every thing owed and to who !!! I think this can be made a bit of every body wrong in places the seller for not telling you >>>> the title company for not seeing it and telling you >>>> and yes there is some to you for not looking more at your closing papers and asking a few questions as to why so few papers

AND yes this is why a simo is better then just owner finance >>>> or at least have a third person collectting the payments and paying all whom need be payed . THIS could have been set up with the title company or a lawyer

7

Good points real estate 001.

Today I:

  1. Check the mortgage balance of the seller. Although I still do not understand how it is legal for a lawfirm/Title Company to set up a note the way they did.
  2. Directly pay the seller’s mortgage rather then paying the seller.

I called a Title Company last night and asked them if it is ok for me to sell a place for less then I owe using seller financing. They said there’s nothing wrong with doing that, and my situation is not unusual. CRAZY!!!

Message for those going under financially and looking for a scam. Lets say you own 5 properties and you’re going to lose everything. Sell everything you own using seller financing for way less then you owe so it sells fast, but require 15k down. Pocket all money at the closing on all 5 properties and live high on life for a while on 15k x 5 properties. As long as you’re going under you might as well go under in style. :biggrin

8

Respectfully I think you were at fault. What you should of done is when you got the purchase agreement signed, you should of also gotten an “authorization to release information” signed from the seller with her loan number and ss#. Then you fax that to the lender and verify all the loan terms such as balance, interest rate etc. Some lenders have their own forms which they will send to the seller to sign.

This is part of normal due diligence for buying subject to existing debt. If you knew the balance you could of spelled it out in writing and to the title company that the 3k will be applied to the existing loan. I don’t blame you though, I can see how you would think they should apply it to the loan. But verifying loan terms before you buy is a normal part of due diligence when buying subject to existing mortgages.

On seller financing if there is a small spread another way the seller can owe more than you is if she has a lower interest rate than the rate that you are paying her because it pays down slower.

In regards to making payments to the seller, I wouldn’t do it unless she has at least 20% equity. Because if anything happens there is equity which you can take from as damages when you are ready to pay it off.

9

The buck stops with the investor in everything. Whether it is insurance, buying/selling, tenants, laws, paperwork, etc. it is the investor’s job to be the expert on everything. There’s no question I should have been more dilgent. The only problem was that this was only my seventh property and my first seller financed deal. So I just didn’t know any better at the time. Over the years Real Estate has taught me that I have to be the expert on everything and can not assume anything will be done correctly by anyone else. I have a friend that says “no one knows how to do their job”. He is right in everyway.

Why have a Realtor or a Lawfirm/Title company if they don’t do anything or know anything to protect a new guy?

10

It’s true, most people don’t even know how to do their own job. I was listening to a mortgage broker and underwriter speak last night and it was funny just how clueless they were. Broker was 3 yrs on the job, underwriter 10 yrs on the job. Did they sleep through their time on the job?

I’m in real estate licensing classes now and my teacher does not stop stressing the fact that as agents we have to know what’s going on since many times the attorneys, etc that SHOULD know better still screw up FREQUENTLY. He was mentioning just the other day a lawyer messing up a transfer tax calculation on a closing, keep in mind the old rate he was using was changed at least 3-4 yrs ago. DUH!

11

Zaphod,

You need to think about this some more. If two loans have the same loan amount and loan term, there is no way for a loan with a lower interest rate to reduce the principal balance slower than a higher interest rate loan. Run some amortization tables to confirm.

Iron Range,

The facts you stated tell us she DID sell for more than she owed. You paid $28K, she owed $27K. It’s clear that the sale price was greater than her loan balance.

I suppose you could have purchased on a contract for deed, but the details you gave us suggest that the title company created a wrap around mortgage. Because you made a $3K downpayment, you should have only FINANCED $25K. The outcome here is that the amount of the seller financed wrap was less than the amount owed on the underlying loan. You paid more than was owed, the seller just financed less than was owed.

I don’t think the title company created a new note for more than the seller owed. Pull out your loan documents to confirm that you really only financed $25K and not $28K. If they had financed $28K, then your loan balance should have been greater than the underlying loan balance at payoff, provided your loan term was as long or longer than the remaining term on the underlying loan and that your interest rate was greater than or equal to the rate on the underlying loan.

Whether the title company bears any fault here is not for me to say. I don’t see anything illegal or unethical here. Nor do I think the title company had any responsibility to apply your downpayment to the seller’s underlying loan balance.

I do believe the seller was naive. You don’t tell us what your loan terms were, but I suspect that your monthly loan payment was greater than the seller’s monthly payment. On the surface, the seller appeared to be coming out ahead each month. The problem was that the seller’s underlying loan balance was greater than the amount she carried back on her wrap. The seller could have fixed this right away by applying your downpayment to her loan balance, or at least as much as was needed to reduce her loan balance equal the wrap amount.

The title company is a neutral third party. Their function is to do everything needed to facilitate the settlement and to transfer clear title. Perhaps the title company could have made both you and the seller aware of the loan imbalance, but I don’t they had an obligation to do so since they are not acting as legal counsel to either party.

Paying a third party loan servicer would not have fixed this problem either. The loan servicer would have taken your loan payment, distributed the amount needed to pay the underlying mortgage, then sent the difference to the seller. Your loan balance would still be less than the seller’s underlying loan balance.

It could be that the seller was deficient in worldly wisdom or lacked informed judgment. Nevertheless, in my opinion the seller is solely responsible for the situation she is in. On the other hand, as long as the seller is bringing enough cash to the settlement table to deliver clear title, where’s the problem?

12

We did create a note for 25K.

There’s obviously no problem for me. BUT…I bought a nice place for a small fraction of what it was worth. I literally stole this property from the seller. So there was a little bitterness. She could have easily been a big B1tch on the money she owed and the abstract.

13

Perfect words to live by Iron Range. I have yet to do a deal where some professional didn’t screw something up, does make you wonder.

14

71tr,

I conclude from the course of the discussion, that the principals in the deal (the buyer and seller) created the problem. In other words, it was the amateurs who did it. Seems that neither the seller nor the buyer had professional representation. I am guessing that they structured their contract without outside assistance or attorney review. Neither was represented at settlement by an attorney.

The only “professionals” involved in this transaction worked for the title company. As a neutral third party, the “professionals” did nothing wrong.

15

I was going to do a sub2, similar situation. I was going to give the seller the payment for her to send in, my also had another twist. The payment due to the bank was more than my payment. This was because the seller had a 20 yr loan but she was letting me do a 30 yr loan and the loan to me was for more than she owed on the property.
I met with an attorney and he said “NO” on both counts and explained the issues to me. After this, I did not buy the property. The consult fee was only $50. This is the best $50 I have spent in a very long time.

16

reihooked,

In a SubTo deal, you take over the seller’s mortgage payments. You make your payments directly to the lender on the seller’s behalf, no payment goes to the seller. You don’t have two loans to deal with, only the seller’s original loan.

Maybe you were really planning to do a wrap around mortgage or perhaps a contract for deed instead?

17

Dave, I agree completely with your conclusion regarding this thread. My comment was based upon my personal experiences and meant to reinforce the notion that the investor is responsible for every detail regardless of the professionals involved.

18

Dave T,

The fact the buck stops with the investor has been said many times in this thread. Thanks for saying it over and over and over.

This wasn’t some back alley transaction. We both had a “Professional” Realtor and we had a Lawfirm that also does closing do the closing. I was a rookie (already said) with only a half a dozen properties at the time. I do absolutely think that the “Professionals” have some responsibility in making sure the deal isn’t hosed from the beginning.

If you think it is ok for a Lawfirm/Title Company to close a deal like this then we definitely think differently. A deal like this should not be legal, nor should it be allowed to close by a Lawfirm or Title Company. My mistake in all this was assuming that a person could not sell a property for less then they owed.

19

Iron Range,

You are still harboring the misconception that you bought the property for less than the seller owed. By your own statements you paid $28K and the seller only owed $27K. You definitely PAID more than the seller owed. I hate to keep saying it over and over and over and over again, but you don’t seem to get it.

If you think you had professional representation from a real estate agent as the buyer, you may also be harboring another misconception. Real estate agents represent the seller (actually themselves first). Even the agent who supposedly represents the buyer is paid by the seller out of the seller’s proceeds of the sale. You may have had a real estate agent make an offer for you, but you need to understand that agents work for the seller. After all they don’t get paid unless the deal goes through. The buyer’s agency is called the cooperating agency because the buyers agent “cooperates” with the seller’s agent to bring a ready and willing buyer to the settlement table.

You may think that your agent is trying to get the lowest price possible for the buyer, while recognizing that the seller’s agent is trying to get the highest price possible for the seller. In actual practice, in a negotiated deal, both agents are trying to find a compromise price that will get the deal closed. It may be less than the seller wanted and more than the buyer really wanted to pay. In the end, the agents are working to make the deal go to settlement so they can get paid (that’s why I say they are really looking out for their best interests first)…

Your contract was not illegal. The terms were mutually agreed to by the parties, the parties to the contract were of sound mind and legal age to enter into a binding contract, and there was a mutual exchange of consideration set to occur within a finite period of time. It met the basic requirements of a legal contract.

Apparently you negotiated a wrap around mortgage with the seller so you would not have to go to a bank for a loan. If you had used an institutional lender to obtain a staight purchase money loan, then the lender would have insured that the seller’s mortgage was satisfied in full at the settlement table as a condition of funding your loan. Since you did not use a traditional funding source, you missed the only opportunity I can see for some “professional” to raise a red flag before you went to settlement.

At the settlement table, the title company has to remain neutral. The title company is not your attorney and can not give either party legal advice at the settlement table – they are neutral. Their sole responsibility is to act as the neutral third party and facilitate the settlement of the contract you had with the seller, execute transfer of title, record whatever legal forms are needed to document the title transfer, and lastly, escrow and disburse the funds brought to the settlement table. The title company would be less than professional if they did render legal advice to either party in the transaction.

I will say it just one more time – you DID pay more for the property than the seller owed, and, you DID NOT have any professionals representing YOU in this deal. At this point, I will quit saying it over and over and over and over again because this horse is surely dead by now.