OT: Partial Seller financing? Anyone ever done it?
- Thread starter PhDKnight
- Start date
From a lenders point of view, sellers 2nd mortgages got a black eye in the 2000's as a source of fraud. Often were used in conjunction with inflated appraisals to get no or little $ down deals done. Many weren't worth the paper they were printed on. I'm in risk management now so I'm not sure how banks look at them no, but post melt-down FNMA considered it as one of the primary red flag areas of concern. I would make sure your lender is ok with it before you get too deep into the process.
So if you are financing then you are now the bank. My business partner does a ton of flipping with seller financing. The big question is what legal documents are you going to use. For instance, when the guy's payment is late what is the fee that PhDKnight Lending charges.
The big question is what sort of premium are you taking for being in second position behind the bank I assume. If you are in second position, and the guy defaults, you should assume you will get next to nothing so the riskiness needs to be reflected in the interest rate you are charging. Even if the guy goes under and the house is recovered with little to no damage, you have to remember that you only will get paid after the first is paid, the banks foreclosure costs are paid, their selling costs are paid etc.
The bigger issue is that higher interest rates on a second make sense if you were making multiple 2nd mortgages - if you had a portfolio. The issue is you seem like you are going to have 1. Therefore what I can definatively tell you is if the loan is paid off and all goes well, you will be happy. If there is a default, you will lose everything. With one loan you can't effectively spread your risk. I would not do it. Your outcome is binary which is bad and the probability of financial disaster is really tied to things you and your borrower can't control in most cases, loss of job and unforeseen major illness or death. Again stay away.
The big question is what sort of premium are you taking for being in second position behind the bank I assume. If you are in second position, and the guy defaults, you should assume you will get next to nothing so the riskiness needs to be reflected in the interest rate you are charging. Even if the guy goes under and the house is recovered with little to no damage, you have to remember that you only will get paid after the first is paid, the banks foreclosure costs are paid, their selling costs are paid etc.
The bigger issue is that higher interest rates on a second make sense if you were making multiple 2nd mortgages - if you had a portfolio. The issue is you seem like you are going to have 1. Therefore what I can definatively tell you is if the loan is paid off and all goes well, you will be happy. If there is a default, you will lose everything. With one loan you can't effectively spread your risk. I would not do it. Your outcome is binary which is bad and the probability of financial disaster is really tied to things you and your borrower can't control in most cases, loss of job and unforeseen major illness or death. Again stay away.
