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David,
You don’t want to be OFF the HUD-1. It’s better to keep all the cardS on the table – so to speak.
To stay out of the chain of title, you can do ittwo ways:
1. You can just assign your contract to the buyer who will close. Your assignment fee will show up on the HUD-1.
2. You can get paid a fee to release your option on the property so the seller can sell to the end buyer. The notarized release form is turned in to the title company and will be treated much like a 2nd lien at closing.
The reason I say you don’t want to be off the HUD-1 is because your buyer signs an affidavit at closing that says there have been no other agreements or payments outside of closing. If the buyer signs this and the lender later finds out you had a handshake deal outside of closing, it could be considered loan fraud.
But…there’s another thing to keep in mind… when using options now….
It is going to be more difficult to find a buyer who can get a loan. It’s not impossible. But it will just take more time.
For ever1 1 buyer who can get a loan there are probably 25+ buyers who have decent credit and a lot of money to put down if they can get seller financing.
So, if you offer seller financing, you’ll be able to sell the house a lot faster and get paid faster.
There are a few ways you can put this together:
You can get an option on the property. The terms would be subject to the mortgage or seller financing. With the agreement that you can resell to someone with a wrap ( no due on sale clause)
Then you do the marketing offfering seller financing to find a buyer quickly.
At that point, you’ve got several ways you can structure the deal:
1. You can get paid a flat fee. ( no commission sturcutre)
2. You can stay in the deal, collect the down payments and get a monthly cashflow
3. you can release your option for a fee which might be equal to 1/2 or all of the down payment money collectedIn Fort Worth, it will be much easier for you to make a business out of selling with seller financing instead of selling to retail buyers who get a new loan ( that would be a slow way to riches these days in Texas)
Jackie –
I think your idea about providing some kind of financing to a buyer is going to be really key in this market. There are a lot of people who can’t get loans right now, but who want to get into a house. I think I understand how to do one if I buy a house with seller financing, but I’m not sure how to do it with a subject to or a “wrap”. What kind of paperwork is needed for those? Does that avoid the due on sale, or is it best to notify the lender that you’re now on title to make sure they won’t call the loan later on? Thanks.
– danDaniel,
You don’t want to notify the lender that you’re in title. Buying this way will not eliminate the due on sale. But believe me, the last thing lenders want right now is more houses. So, if you make the payments on time and keep the property insured, you’ll have an extremely low chance of the lender calling the loan due because of the due on sale clause.
For a subject to deal you just include in the agreement that you have the right to sell it again.
For a wrap, you want to make sure that your note is non-recourse and that the deed of trust or mortgage contains no due on sale clause — so you can sell again without the seller calling the loan due.
The mechanics when buying are:
write a contract to buy from the seller ( seller finance or subject to)
IN addendums include language that there is no due on sale clause and any other terms you agreed to
If seller financing, define the terms of the note
Ideally, the whole thing is contingent upon you finding a buyer by a ertain date( OPTION)
note — even with an option, you get ALL the details worked out in advance.The mechanics when Selling are: ( if it is a wrap)
write a contract to sell to your buyer
Defiine the terms of the note – everyone signs this
Include a due on sale clause in their deed of trust or mortgageYou turn all the contracts in to the title company or escorw or attorney and let them prepare the documents.
At closing, I have the seller sign a letter that will be sent to the lender that says my XYX management company will be managing all affairs for the property – please mail future statemenst and notices to my XYX management company address.
I also have the seller sign a letter to cancel their home owners insurance and have the unsed premium sent to XYX management. I make sure that I have a new insurance policy on the property for the day of closing.
Peter,
The seller might get some cash at closing – but they would not get completely cashed out.
It’s our jobs as investors to adequately explain to sellers WHY getting cashed out is not possible these days. It is better to NEVER make a promise on when their loan will be paid off — because you just don’t know what will happen.
Here are some sample numbers – so you can see how it might work.
House is worth $250,000
There’s a $200,000 mortgage @ 6.5% fixed
PITI = $1560 ( assuming $300 a month for T & I)
House has been listed for 9 months – no offers.
Sellers need to move asap and they just want payment relief.You get an option for $200,000 with the agreement that anything you can get for a downpayment from the buyer you find, you will split 50/50 with the seller. Let’s say, this option is to buy the house subject to the mortgage at the $200k price
You sell for $250,000
Buyers have $20,000 to put down
Leaves a mortgage balance of $230,000 that WRAPS the underlying loan.
Interest rate is 8% fixed — 3 year balloon
PITI = $1987 per monthAt closing:
the seller gets $10,000
you get $10,000
Buyer gets deed to the propertyYou get $427 a month cash flow for THREE years
($15,372 total)at the end of 3 years, amoritization has not brought the loan balance down much — so let’s say the balance is $227,000 on the wrap
and $197,000 on the underlying loanAt the end of 3 years, you get another payday of $30,000
YOU DON’T SELL THE NOTE – YOU DO NOT TAKE A DISCOUNT
Add it all up, you make $10,000 + $15,372 + $30,000 = $55,373
yea, it would be nice to get to the $30,000 faster and just sell the house — but it is the CASH FLOW that really makes this deal.
So, we all need to be in less of a hurry to get to the pay off and focus more on building up cashflow
What if you had 5 houses like this one, that’s more than $2,000 a month coming in no matter what you do.
What if you had 10 of them…
See why building up the cash flow is a BETTER way to go now?!
I know it is a hard paridigm shift to make – but when you do, your whole life will change.
Jackie
you get $10,000 in a down payment
you get $15,000 + in cashflow in 3 yearswhen the house sells, you get another $30,000 ( the difference between the underlying loan balance the the wrap loan balance)
LOVE THOSE WRAPS!
Hank,
Your buyer selection should be much like a tenant selection.
I get an authorization to check their credit and background.
Then I use http://www.ntnonline.com to check them out.
This is what I’m looking for
1. they can afford the monthly payments easily with their current income
2. they have a good track record of paying others on time ( if there are any glitches, it needs to be an isolated situation ( usually medical)
3. good job history – I like at least 2 years at their current job or at least 2 years in the same line of work
4. no evictions
5. no criminal record
6. no sex ffenders
7. no terrorists
8. No alias ( changed their name – raises red flag)I bet you’re laughing — But you’d be surprised who applies to buy your house
NTNonline will check to see if they are on a sex offender list or a terrorist lists and ALL the things on my list.
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