Carrying a second mortgage to help in sale of rental

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  • Hi all –

    One of my tenants wants to purchase the property they are renting. They have been my tenants for about 6 years now and are probably the best tenants I have ever had. Always pay on time, take care of most repairs and take great care of the house. Their credit however, is not the best and they have had problems qualifying for a traditional mortgage before. They love the house, are working on their credit and I would really like to sell it to them in the next few months.

    I could sell on a lease option but unfortunately, the underlying mortgage is an ARM and could adjust in a couple of years so I would prefer a sale instead. I am also trying to avoid having to put the house on the market, having holding costs while it sells, doing minor repairs, etc, etc.

    The sale price I have in mind is probably around 180K. The underlying loan balance is around 118K. Let’s say for example that they qualify for 170K, can I hold a second mortgage to make up for the remaining 10K in this example? Is this a good/bad idea? I think I heard or read somewhere that most traditional lenders would not like such an arrangement, is that true?

    Any advice and/or feedback will be appreciated it.



    There are many ways to sell a property to someone who wants to buy it. Its perfectly legal and ethical to sell a house and carry back a mortgage for your buyer. Just don’t hide it.

    Have your buyer get qualified by the best mortgage broker in your area to see exactly what they’ll qualify for. After getting the numbers back from the mortgage broker, you can arrange the sale price and terms to benefit both parties.

    BTW, your lease option can be for just a few months.
    Far short of the time when the ARM might adjust.

    The next step is having a place for the funds coming out of this sale so you don’t have unnecessary tax liabilities. i.e. 1031 exchange. You may face more losses in taxes than the $10k price difference.

    You can bring in a private investor to fund any shortfall via buying an option.
    I’ve done this for several buyers in my local market.

    Remember, all roads lead to Rome. Plan this out and you’ll be into your next deal before you know it.

    Keep us posted,


    You could also buy the option yourself.

    Thanks for the great advise Mike and Don….appreciate it.

    Mike, great point about planing on what to do with the funds…been thinking about that. Could you explain in some more detail what you mean when you say ” You can bring in a private investor to fund any shortfall via buying an option.” ?

    Thanks in advance!


    Here’s what I did in Las Vegas recently.
    A friend wanted to buy a condo, but didn’t have a down payment and closing costs.

    That came to $8,000. I bought an option on the condo for 1/2 the upside above the then existing mortgage balance for the next 10 years.

    My $8k was NOT a loan, so the bank that made the loan saw that there was no debt and no payments due from the borrower. My option was recorded after the first mortgage/trust deed to protect my position. The purchase price was $60,000. The value now is well in excess of $100,000. So, my $8,000 has grown to over $20,000. (half the difference between the value, $100,000, and the mortgage balance).

    That was a few years ago. My option $$ has grown to over $20,000 with NO management, NO headaches with someone I know. While its not the greatest return on investment I’ve made, its still over 21%, its about the safest.

    The underlying loan is in the 4.5% range so if something goes sideways, the rents will easily cover the payments.

    As of this new year, we are talking about her moving out to another property and renting out the condo as an Airbnb unit. She wants to pay off the option with the increased cash flow that Airbnb can provide.

    Its great to work with others towards mutually beneficial goals.

    Hope this helps,


    Hi Mike,

    Thanks for the additional details. I understand what you meant better now. That is a good return on your $8K especially since is it involves no work on your part.

    I am curious to know, at what point during this type of transaction is the option bought? Is it at closing, after closing?



    Glad this is helpful.

    The option was bought at closing. The buyer had excellent credit. But she had no money for a down payment and closing costs. The option/down payment funds were needed to close the transaction.

    Hope you are able to sell this property and move on to your next one.


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