Seller Financing Questions
I am new to the game and looking at a 6 unit with seller financing. Could someone please explain how this works?
Would I get the title and he would place an encumberence on it?
Would I need title insurance?
Is this something the seller and I work out on paper or do we contact a lawyer to draw up the paper work?
Thanks ~
Any time when you don't have 110% of answers you need, and you haven't done this at least once or twice - always at elast consult a lawyer. I couldn't have ever figured half of the things I now know without mine. You'd be surprised how much someone who does this for a living will be able to teach you and new ideas that you can get simply by asking questions. Don't make it about just paperwork. It's the details where deals like this can get sticky. Make sure that you get help structuring the deal in a way where your risks are absolutely minimal. A good attorney will know how to do that.
-Greg
Greg ~ thank you for the super fast reply. Could you give me some of the "sticky" things I should look for when making this deal.
Oh God, where do I start! How about the major ones: Are there existing tenants? Have you seen leases? Have the attorney or another experienced RENTAL investor look at them over. Are leases ending on different months, or will you have one month that half the tenants will be moving out, and you will have negative cashflow? What about plumbing? building codes? hidden flaws that are not being shown to you? True reason for selling? Population/job trends in the area?
Now to the actual owner financing: 6-plex is not a residential loan, it HAS to be a commercial loan. Will the bank be aware that you have a secondary note? How will the note be written? Will this be an actual mortgage note recorded in the court against the property like a bank mortgage? Will this be a "gentleman's agreement" on a piece of paper that is MAYBE notarized? what is the penalty if you default? Some owners have you put a quit-claim deed into escrow in case of a default. In plain English - you don't pay, he gets the 6-plex back. You're stuck with the primary mortgage though. What about the DOS(due-on-sale) clauses? If you sell/refinance the property, will that oblige you to pay up the remainder of the principle? What about prepayment penalties? Interest will be a part of your seller's income from this property, I usually don't want to have someone prepay things without getting at least some of the extra interest - hey, I took a risk!
So, as I said before.... talk to a guy(or girl) that does this for a living, and have them structure your actual deal where you have very little risk left.