Now that you have a basis of understanding for seller-financed transactions, the next step is to really understand the deal and learn what issues and complications might arise.
The first and most obvious is the due on sale clause when there’s an underlying mortgage. The key here is to reduce the red flags to the bank. Most banks, especially the big ones, do not routinely check title to see if the borrower has sold the home. They only check if there’s a reason to. You want to limit your conversations with the bank, try to do everything online, do not modify the underlying insurance as the bank will be alerted to that, and be careful about how you make payments. I could spend a lot of time on this as there are numerous ways to accomplish this.
Another issue that does come up (I’ve seen it many times) is when the seller misunderstood the transaction and then wants the mortgage paid off. This might be due to faulty (or lack of) communication by the investor, forgetfulness, or they just want it removed. They may even get a lawyer who doesn’t understand subject-to and claims that it is illegal to leave someone’s mortgage in place with the house is sold. Having really good documents and disclosures goes a long way in protecting yourself.
Then there are issues with the sellers. What happens if the seller dies? What happens if they file for a bankruptcy? What happens if they disappear on you? I always recommend keeping in great contact and a great relationship with the sellers. These deals are long-term partnerships with them. You can use family trusts to help here and get contact information on relatives or accountants or other professionals that might also have access to the sellers.
The key here really is to think about these problems in advance, talk about them with the seller and come up with solutions at or before closing. Once a deal is closed, you may never see or hear from them again. I recommend a closing round-up. Maybe at the closing table or just before, sit down with your sellers and go over these things so that they understand what they are getting into. Like I said, most of these deals go south when the investor fails to adequately educate their seller.
Seller-financing is an amazing tool. But it is an advanced real estate investing technique. You should really become educated in these matters as much as possible before entering into them. I’ve seen a lot of tragic stories!
For more information, please see my website link below!
Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180