Posted by Jack on September 07, 2000 at 23:28:51:
Thanks for the compliment friend
“Now when this is done is it actually assuming the loan or having a contract and an escrow account with the seller to just take over payments?”
An example will be the easiest way to explain the process. So, let’s say you want to purchase a property I’m selling. I own the property with no mortgage or leins. I’m asking $100,000. I can refinance for 80% of the property value. That would give $80,000 in cash plus I’ll owe a mortgage of $80,000 plus the interest. You offer $90,000 and I accept. You don’t have money for a down payment, and you’re over leveraged from buying properties from conventional lenders. So you propose that I refinance for the $80,000, and you offer $90,000 on a seller financed note that is to be wrapped around my new mortgage. We deal for the interest rate and the monthly note payments. Since I’m the seller, I could be flexible. I could set the note payments at the amounts I owe, and charge the interest I’ll be paying; but, once my new mortgage is paid off, you would still be paying off the remainder you contracted for. That money would be spreadout as an income for me until you’ve paid off the property. Meanwhile, I’ve got $80,000 that you’re paying off, and it’s for my immediate use. You on the otherhand, received the property on a nothing down deal. But you’ll also be paying the taxes, insurance and upkeep on the property.
“Im sure it is not based just on trust, I guess IM asking for a little more detail for a situation that this can work in…Is this what always happens when asking a seller to refinance, do they keep the money while you take over the payments,”
Yes. It’s just a creative way of allowing them to get
most of their cash out immediately.
“what benefits to the seller is this, does it affect their credit at all to do this.”
The benefit is the 80% they receive up front. The second benefit, is selling the home to you. You are giving an additional $10,000+ with interest, and even though it’s less than market appraised value, the home might have sold for even less on a conventional deal. And, you now pay the taxes, insurance and upkeep on the property.
If you defaulted, the seller would repo the property; and inorder to keep from hurting their own credit, because your mortgage is wrapped around theirs, they would be forced to make payments. They could resale, or rent the property out. But during the time that you quit making payments, they would also need to make payments, because if you fail to make your note payments, they will be forced to keep the refinaced mortgage current, or else stand to lose the property. This is the drawback of selling under these conditions; and today, some mortgage companies might include a clause that prohibits an owner from wrapping a refinanced deal with a wrap-around mortgage. So you need the seller to check on restrictions before you enter such a deal. And never do a deal like this on a private contract for deed. You want your wrap-around mortgage recorded. Years down the road you don’t want a seller that might take advantage of the situation and borrow more money against the property before you’ve paid it off. And, if you ever do enter a contract for deed on any type property deal, take it to the court house and have it recorded with the owner’s records. This will serve as a protection to you if they seek a loan against the property during the life of your contract for deed.
I hope I’ve answered everthing, and I wish you success on your future REI deals. —Jack