Agreement for sale where seller waits for his equity!

[larolargo]

I`m a little bit confused on how to write a "contract of purchase and sale" + "agreement for sale schedule financing" in which I buy the house with AFS and the seller agrees to wait until I cash out to get his equity.

Lets say numbers are:

ARV: $550,000

Ask: $520,000

Loan: $480,000

Payment: $1,800 PITI

So I`ll take over the loan with AFS and then I`ll put a balloon on the note for 3 years to pay seller`s equity of $40,000.

Where in the agreement do I write that I` pay the seller in 3 years.

It would be very nice If somebody could show me a real life example.

Thank you very much!

Mario Ferreira

 

[Thomas Beyer]

QUOTE (larolargo @ Nov 16 2010, 04:55 PM) ..It would be very nice If somebody could show me a real life example.
take a NORMAL offer to purchase.

On page 1, where it mentions first deposit, 2nd deposit, purchase price and 1st mortgage .. add (or use the pre-printed line) vendor financing, state: $500,000 .. via agreement for sale (as opposed to a 1st or 2nd mortgage) as per appendix A.

Let`s say your first and 2nd deposit is $20,000 .. and AfS is $500,000 for a $500,000 owing in the future !

You do NOT assume his mortgage. You are not the new owner. You agree to a FUTURE SALE. It is an agreement for sale, or for greater clarity: an agreement for future sale !

Appendix A reads s.th like:

Buyer agrees to purchase property via agreement for sale for $500,000, at 4% interest, payable monthly, interest only, due On Dec. 31, 2013. Buyer will pay for all property upkeep, property taxes and property insurance as any owner would reasonably.

Thus, on Dec 31, 2013 you owe him $500,000 ! From that presumably he pays his mortgage .. and now you go on title as the owner and his interest disappears!

In the mean time you pay 4% of $500,000 i.e. $20,000 or $1666.67 per month plus taxes, insurance etc. .. and from that the seller pays his mortgage. Thus, ensure that your payment to him exceeds his mortgage payment.

THAT`S IT !

The seller stays on title until Dec. 31, 2013. You add your interest AfS in the property as a caveat on title in 2nd position. You treat property as if you owned it (although you do not yet!!), pay taxes, move in (or rent it) .. and then in 3 years time you pay him out ... presumably from a re-finance or a sale.

There is risk for you the buyer as seller might not pay his mortgage and bank now forecloses. You now have to work with bank to re-fi early.

There is also risk for the seller as you might nor pay him his $1666/month and her has to get a court order to get you off title.

Hence, it is rarely done.

GET PROPER LEGAL DOCUMENTS AND A LAWYER THAT UNDERSTANDS IT ! Since it is rarely done, most lawyers .. and certainly most realtors .. do not understand it.

I have done it twice in a commercial multi-family context .. but never on a residential deal. It is usually done to avoid huge mortgage discharge penalties and as such the AfS has to be lined up with the mortgage end date ! It is another form of a 2nd mortgage .. and also referred to as a wrap mortgage, in that you wrap your interest in the property around the existing first mortgage !

 

[lanedry77]

Hi Mario,

Thomas` method is completely valid, but I do it a bit differently;

- presuming the seller doesn`t need any money now (as it sounds like in your post), there would be no initial deposit or additional deposit. While not traditional, this is completely legal (and great for you - it`s a free house!)

- the purchase price of $520,000 is put as the `purchase price` on page 1

- the $40,000 of his equity goes in as `seller financing` on page 1

- the mortgage of $480,000 goes in as `assumption of mortgage` on page 1, but write in "by way of agreement for sale" and everyone initials.

- in the terms of the sale, write "This sale shall proceed by way of `agreement for sale` (AFS), to be completed by the buyers lawyer. The AFS financing schedule forms part of this agreement.

then, in the AFS financing schedule (I use Barry McGuire`s version) you outline that you will take over the mortgage payments ($1,800 PITI) from the seller, and then pay him $40,000 at closing of the contract - which will be on or before the mortgage renewal date.

To make sure everything goes smoothly, YOU make sure the mortgage comes out of YOUR bank account. same with taxes and insurance. I prefer to get my own insurance with only me on the policy name, to make it easy in the future when I have to cancel the policy. You will probably need your sellers cooperation immediately after possession to change the withdrawal account at the bank.

In doing it this way, YOU benefit from the mortgage paydown that occurs with covered by the AFS.

Also, the seller is getting today`s price. A side benefit to this is that you`re paying today`s price with tomorrow`s dollars, so you also benefit from inflation.

In doing it this way, your out-of-pocket costs to buying this property should be under $1,000 - just your legal costs. That`s as cheap as houses get, so congrats!


A quick question Mario - is $1,800 (PITI) a reasonable cost for this property? even if it`s free, if that is too much per month, it could sink you. Will you be able to get more than $2,000/month out of the property?


Thanks,

David.

 

[larolargo]

QUOTE (DavidSandbrand @ Nov 16 2010, 04:12 PM) Hi Mario,

Thomas` method is completely valid, but I do it a bit differently;

- presuming the seller doesn`t need any money now (as it sounds like in your post), there would be no initial deposit or additional deposit. While not traditional, this is completely legal (and great for you - it`s a free house!)

- the purchase price of $520,000 is put as the `purchase price` on page 1

- the $40,000 of his equity goes in as `seller financing` on page 1

- the mortgage of $480,000 goes in as `assumption of mortgage` on page 1, but write in "by way of agreement for sale" and everyone initials.

- in the terms of the sale, write "This sale shall proceed by way of `agreement for sale` (AFS), to be completed by the buyers lawyer. The AFS financing schedule forms part of this agreement.

then, in the AFS financing schedule (I use Barry McGuire`s version) you outline that you will take over the mortgage payments ($1,800 PITI) from the seller, and then pay him $40,000 at closing of the contract - which will be on or before the mortgage renewal date.

To make sure everything goes smoothly, YOU make sure the mortgage comes out of YOUR bank account. same with taxes and insurance. I prefer to get my own insurance with only me on the policy name, to make it easy in the future when I have to cancel the policy. You will probably need your sellers cooperation immediately after possession to change the withdrawal account at the bank.

In doing it this way, YOU benefit from the mortgage paydown that occurs with covered by the AFS.

Also, the seller is getting today`s price. A side benefit to this is that you`re paying today`s price with tomorrow`s dollars, so you also benefit from inflation.

In doing it this way, your out-of-pocket costs to buying this property should be under $1,000 - just your legal costs. That`s as cheap as houses get, so congrats!


A quick question Mario - is $1,800 (PITI) a reasonable cost for this property? even if it`s free, if that is too much per month, it could sink you. Will you be able to get more than $2,000/month out of the property?


Thanks,

David.

Thanks a lot David and Thomas!

Well that`s a detached 4 bedroom, 2 1/2 baths, 2700 sqf in Surrey. I`m not 100% sure but I believe I can rent it out for $2,000-$2,000. I`ll double check it. There is even a swimming pool in the house.

The deal is not 100% sure, but the seller is kindda receptive to the idea of waiting for equity.

Another question that i have is, what do you do if the mortgage term is due and the tenant/buyer hasn`t been able to get a loan?

Can the seller or you get another extension from the bank or will the loan be called due if tenant/buyer needs more time?

What`s the best way to handle pre-payment penalty?

Thank you again Thomas and David!

Mario

 

[Thomas Beyer]

QUOTE (larolargo @ Nov 16 2010, 06:33 PM) ..I`m not 100% sure but I believe I can rent it out for $2,000-$2,000. I`ll double check it.
Don`t do a deal if you`re not sure about rents ! More due diligence is required !

QUOTE (larolargo @ Nov 16 2010, 06:33 PM) ..Another question that i have is, what do you do if the mortgage term is due and the tenant/buyer hasn`t been able to get a loan?
The bank will usually issue new loan terms, based on the current mortgage amount at rack rates which are 1.5% to 2% above competitive terms .. or they may call the loan due. If unpaid they will, in due time, after many months, start foreclose proceedings and you may lose the house.

Then four parties may start lawsuits: bank, you, the previous owner and the new tenant-buyer .. and it will be a big mess !!

QUOTE (larolargo @ Nov 16 2010, 06:33 PM) ..Can the seller or you get another extension from the bank or will the loan be called due if tenant/buyer needs more time?
see above answer .. most banks are reasonable with extensions .. but they have the right to call the loan due .. and sometimes (but not usually immediately) they will !!

QUOTE (larolargo @ Nov 16 2010, 06:33 PM) ..What`s the best way to handle pre-payment penalty?

Well, you agreed to buy the house in the future, with certain terms. If you have the contractual right to buy it earlier, then the current owner pays the penalty. It depends on the contracts you and the seller sign.

Since you are sandwiched between a seller (who still owns it) and a tenant buyer .. ALL SORTS OF THINGS CAN AND FREQUENTLY DO GO WRONG !

This AfS and TB business is not for novices ! Do it only after you have done 5 or more successful normal deals ! They go smoothly only in mid-night info-mercials or on the power point slides by fast speaking (and often US based) sales people !

 

[lanedry77]

Hi Mario,

I don`t want to come-off as me talking you out of the property, I just wanted to make sure you were going in with realistic numbers. If the true market rent is $2,000+, you should be find, especially since a RTO buyer will pay more each month.

If the seller needs some money now to make the deal work, I wouldn`t let that kill a good deal.

also, no deal is 100% until everything is signed. In fact, even then it`s not 100%... I`ve had sellers change their minds and refuse to close, but that`s a whole other story.

But in answer to your questions;

- If the underlying mortgage is up in three years, you should be able to get an RTO buyer qualified in that time. I shoot for 1 year, with 2 years being a long term. You can always get the seller to agree to renew the mortgage in the future, if needed.

- The mortgage can always be called due by the bank if they don`t like what is going on. It`s always a risk. The real-world situation is that the banks don`t really care as long as the mortgage is being paid, so it`s not a high risk.

- If three years comes, and you haven`t been able to get the tenant/buyer qualified, and the seller won`t renew, you have a couple options: You could always bring in an investor. If the value has gone up enough, you can get a short-term hard money loan, buy the property, then re-fi it to get the expensive money out. You could walk away too, but this is a BAD option, as it ruins a lot of things including your reputation and likely your tenant/buyers life. Bad.

- I opt to take the payout penalty as my responsibility, if it`s a reasonable cost (like under $10,000). My logic is that I will gladly pay a penalty to access my profits. In fact, the penalty just comes out of the profits, so it`s almost `made up` money that you`re loosing. If the penalty is going to be excessive, you could split it with the seller.


Thanks,

David.

 

[larolargo]

QUOTE (DavidSandbrand @ Nov 16 2010, 06:17 PM) Hi Mario,

I don`t want to come-off as me talking you out of the property, I just wanted to make sure you were going in with realistic numbers. If the true market rent is $2,000+, you should be find, especially since a RTO buyer will pay more each month.

If the seller needs some money now to make the deal work, I wouldn`t let that kill a good deal.

also, no deal is 100% until everything is signed. In fact, even then it`s not 100%... I`ve had sellers change their minds and refuse to close, but that`s a whole other story.

But in answer to your questions;

- If the underlying mortgage is up in three years, you should be able to get an RTO buyer qualified in that time. I shoot for 1 year, with 2 years being a long term. You can always get the seller to agree to renew the mortgage in the future, if needed.

- The mortgage can always be called due by the bank if they don`t like what is going on. It`s always a risk. The real-world situation is that the banks don`t really care as long as the mortgage is being paid, so it`s not a high risk.

- If three years comes, and you haven`t been able to get the tenant/buyer qualified, and the seller won`t renew, you have a couple options: You could always bring in an investor. If the value has gone up enough, you can get a short-term hard money loan, buy the property, then re-fi it to get the expensive money out. You could walk away too, but this is a BAD option, as it ruins a lot of things including your reputation and likely your tenant/buyers life. Bad.

- I opt to take the payout penalty as my responsibility, if it`s a reasonable cost (like under $10,000). My logic is that I will gladly pay a penalty to access my profits. In fact, the penalty just comes out of the profits, so it`s almost `made up` money that you`re loosing. If the penalty is going to be excessive, you could split it with the seller.


Thanks,

David.

That`s good to know banks are somewhat flexible as long as you are making their payments.

The BC`s contract of purchase and sale doesn`t have a section for "seller financing/assumption of mortgage" on it. Should I add one below "purchase price/deposit(section 1 and 2), or just write under "terms and conditions(section 3)? Or just add to "CONTRACT OF PURCHASE AND SALE ADDENDUM/AGREEMENT FOR SALE SCHEDULE".

Do you stick with any specific price range for those kind of deals or it doesn`t really matter?

For example, in Surrey where I`ve been able to find most of my leads in the median price range which is $516,000 for a detached. But I was wondering if it`s not too high for rent to own buyer. Are those buyers mostly first time home buyers or it can be any type of buyer?

I`m just worried these range might be too high to find a tenant/buyer!

Thank you so much David for clarifying my quick turn questions!


Mario

 

[Dan_Eisenhauer]

One thing to keep in mind is that when you do an AFS in BC, you trigger PTT the day the agreement is registered. If you do an RTO that PTT is delayed until the actual closing.

One lawyer who knows a lot about RTOs and AFSs in BC is Rick Ledding. I believe he is a REIN member. He works with Thomson & Elliott on Broadway.

 

[larolargo]

QUOTE (Dan_Eisenhauer @ Nov 17 2010, 02:08 PM) One thing to keep in mind is that when you do an AFS in BC, you trigger PTT the day the agreement is registered. If you do an RTO that PTT is delayed until the actual closing.

One lawyer who knows a lot about RTOs and AFSs in BC is Rick Ledding. I believe he is a REIN member. He works with Thomson & Elliott on Broadway.

Would you recommend not registering the agreement until the ultimate buyer cashes me out so I don`t have to for transfer tax?
Thanks for the lawyer recommendation !

Mario

 

[lanedry77]

QUOTE (larolargo @ Nov 16 2010, 08:39 PM) That`s good to know banks are somewhat flexible as long as you are making their payments.

The BC`s contract of purchase and sale doesn`t have a section for "seller financing/assumption of mortgage" on it. Should I add one below "purchase price/deposit(section 1 and 2), or just write under "terms and conditions(section 3)? Or just add to "CONTRACT OF PURCHASE AND SALE ADDENDUM/AGREEMENT FOR SALE SCHEDULE".

Do you stick with any specific price range for those kind of deals or it doesn`t really matter?

For example, in Surrey where I`ve been able to find most of my leads in the median price range which is $516,000 for a detached. But I was wondering if it`s not too high for rent to own buyer. Are those buyers mostly first time home buyers or it can be any type of buyer?

I`m just worried these range might be too high to find a tenant/buyer!

Thank you so much David for clarifying my quick turn questions!


Mario
QUOTE (larolargo @ Nov 17 2010, 03:17 PM) Would you recommend not registering the agreement until the ultimate buyer cashes me out so I don`t have to for transfer tax?
Thanks for the lawyer recommendation !

Mario
Hi Mario,

I don`t know BC paperwork, but I would guess there`s a spot to enter this kind of information. It might be called something different. What are the line items in the pricing section of the standard offer contract? If you can scan a copy and post it, that would help.

I find properties around the median are best, but in a market with such high prices you will need to make sure you can cover the monthly carrying costs (ie; look for properties with good mortgages that you can take over).

Most RTO tenant/buyers are 1st time buyers. I`d say the average is a young family with two kids who have been renting far too long because bad credit and poor money skills have stopped them from buying. But they come in all shapes and sizes!

And be careful - not registering the agreement could put you in a very vulnerable position. the property could get sold from under you, and you would have no recourse.

Since I`m not from BC - how much would the transfer taxes cost on a $500k property?


Thanks,

David.

 

[marcp]

David, can you elaborate on how you set up the insurance? Do you take out your own policy on top of the seller`s, with you as loss payable? Typically the loss payable is whoever is on title / mortgage, so I`m unclear how to insure an AFS.

Cheers,

 

[lanedry77]

Hi Marc,

I have a new policy put on the house with my name as the insured, and loss payable is the bank holding the mortgage.

Nowhere on the policy is the name of the seller.

The seller can cancel their insurance when this is done.


Thanks,

David.

 

[larolargo]

QUOTE (DavidSandbrand @ Nov 17 2010, 09:14 PM)
Hi Mario,



I don't know BC paperwork, but I would guess there's a spot to enter this kind of information. It might be called something different. What are the line items in the pricing section of the standard offer contract? If you can scan a copy and post it, that would help.



I find properties around the median are best, but in a market with such high prices you will need to make sure you can cover the monthly carrying costs (ie; look for properties with good mortgages that you can take over).



Most RTO tenant/buyers are 1st time buyers. I'd say the average is a young family with two kids who have been renting far too long because bad credit and poor money skills have stopped them from buying. But they come in all shapes and sizes!



And be careful - not registering the agreement could put you in a very vulnerable position. the property could get sold from under you, and you would have no recourse.



Since I'm not from BC - how much would the transfer taxes cost on a $500k property?





Thanks,



David.






In BRITISH COLUMBIA the Property Transfer Tax (PTT) is as follows:



1.0% on amounts up to and including $200,000



2.0% on the amount exceeding $200,000



So for a $500,000 property in BC, I'd have to pay $8,000 in transfer tax. And you get around 3% of option deposit which is about $15,000+taxes+closing+inspection. Instead of you quick turning the property, your money gets quick turned!!!



Is there any other way to prevent the seller from selling the property under without having to pay land transfer tax?



I guess I should move to Alberta.



Thanks again David!



Mario