Real Estate Home Mortgages/Seller financing
We own a townhome, the mortgage on this is 220k, we need to sell so we are selling it for 220k just to get out of it, our monthly is 2000. We are working this deal with a friend.
He gives us 100k cash, pays the mortgage for 5 years, by now he has paid another 120k he is done paying the 220k we agreed upon. Now we have to give him a clean title.
Now this is what we are doing with the 100k he gave us. We are buying a home for 180k cash. We will have no mortgage for 5 years, at the end of the 5 years we will find out how much is left of the mortgage we are financing for our friend and then mortgage the existing home to pay for the townhome.
We are doing this because we are starting our business and being self employed we cannot get a mortgage. So we figure pay me now or pay me later. Is this a good move? We are not paying interest in the 100k cash we are getting upfront.
Since value is in the eye of the beholder I cannot tell you if its a good deal or not, however I can see a couple of holes you probably will want to consider as you work on the transaction. Here are the primary concerns I would see in the transaction- there could of course be others.
1. If your friend pays you 100K down plus the mortgage for 5 years- is he not paying the interest on the remaining $120K? That interest portion will be significant and could leave you upside down on the transaction- something that could harm both you and him as you may not be able to give him clear title to the property in 5 years. 120K at 4% interest is 4,800.00 annually, which totals $24,000.00 over 5 years- with some adjustments for amortization of course.
2. If you have not paid down the mortgage with your initial income of $100,000.00 you will have interest accruing on $220,000.00. This means the interest accrual will be nearly twice as high. Keep in mind that it is not common or reasonable for a buyer to not pay any interest on the mortgage, even when the mortgage is financed by the seller.
3. In 5 years you have an unknown value on the new home you are buying. Current housing models could leave you with a home worth close to what you are paying for it right now. It is therefore very possible that you will owe more on the payoff of your current house than your new home will be worth- this goes to the concern listed under #1.
4. Your current mortgage may have a due on sale clause in it. If it does the current mortgage lender could demand payment in full if they discover you sold the home without paying them off first. You may want to check your current mortgage terms to see if that is the case.
5. I recommend caution when working with friends. I have seen many friendships destroyed over dealings such as what you are describing with far fewer dollars involved. You may want to consider if this transaction is worth the possibility of losing the friendship.
6. If you move forward i strongly recommend that you use a real estate attorney or title company to close the transaction to make sure every detail of the transaction is spelled out completely. If something does go wrong you want to make sure the agreement addresses the concerns completely. I also recommend you use an escrow payment company to handle the payments for you. They would have your friend pay them, then they would pay the lender. This is crucial for documentation that payments were really made, and they track what the current outstanding balance is, handle the tax papers required at the end of the year and such. The cost is low and its a valuable service. I have seen multiple cases where the new owner of the existing house gets delinquent on the mortgage, and the former owners- or you in this case- ends up with bad credit or a foreclosure along with a summary judgment for any outstanding funds due from the mortgage lender. If he misses a payment the escrow company would notify you.
I hope this helps you as you decide on moving forward. I am not trying to discourage or encourage, I am just trying to outline the problems I have seen others have when selling real estate to friends with seller financing.
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