What To Do If Your Seller Is In Arrears

This might sound like a red flag, but it's not a major issue for a terms deal—as long as you understand how to navigate it.

What To Do If Your Seller Is In Arrears

In the terms niche, we provide solutions for sellers who are having difficulty selling their home and buyers who are unable to purchase a home conventionally. That means we often deal with sellers and buyers who are in very unique situations. Whether it’s a seller who is desperate to move or a buyer who had an incident in the past that is affecting their credit, we can help both parties out.

In this case, we’re going to look at a deal where the seller was actually behind on his mortgage payments by several months. This might sound like a red flag, but it’s not a major issue for a terms deal—as long as you understand how to navigate it. Keep in mind that the harder a deal is to structure or a problem is to solve, the more we like it. It’s all about helping sellers and buyer solve a challenge or accomplish a goal they’re otherwise not able to.

Navigating the situation

When our Associate was reaching out to expired listings in his area, he got a call back from a seller whose home had recently expired after being on the market for six months. He wanted to move to Florida, but he needed to sell his house before he could make the move. He was desperate to get the property out of his hands, and he explained that he was actually in arrears with respect to his mortgage payments.

Our Associate talked some numbers with the seller and explained that he could provide a solution for both of his problems. Not only would he be able to take over the property and sell it on terms—so the seller could move to Florida—but he could also easily work the missed payments into the deal.

He explained that if he were to structure a sandwich lease purchase, he would pay off the underlying debt on the property and give the seller the remaining equity he was owed. In this case, there was a loan balance of $280,000. The seller was trying to get $300,000 when he had it on the market, which meant he would be netting almost nothing after closing costs and realtor fees. Our Associate proposed paying off the $280,000 in debt (at the end of the term of course) and giving the seller $25,000 in equity.

That means he’ll be netting more than he would have with a realtor (before closing costs) and he doesn’t have to worry about those payments because our Associate is taking over the mortgage. The missing payments are simply factored into the equity he’s receiving.

How could he say no? It’s a win-win situation for both the seller and our Associate. Better yet, it’s a win-win-win when you include the tenant buyer as well.

The tenant buyer

Our Associate ended up structuring a 36-month sandwich lease purchase with the seller. This is slightly shorter than the terms we usually opt for especially coming out of COVID, but the seller needed the money quickly and 36 months was the longest he was willing to wait.

The house was marketed for around four weeks before our Associate found a qualified tenant buyer. So from start to finish, it took about five weeks to complete this deal!

All 3 Paydays™

Payday #1, the down payment, started with a $20,000 installment from the tenant buyer—around 6% down. Our Associate wanted to get her to a 10% down payment and asked her what she would be capable of putting down over the next year and a half. Ultimately, she agreed to put an additional $2,000 down every quarter until she got to 10%.

That comes out to an additional $16,000, making Payday #1 $36,000.

Payday #2 is the monthly spread on the property. Our Associate was getting $2,752 in rent from the tenant buyer and paying out $2,403 for a spread of $349 per month. Over 36 months, that comes out to $12,564.

Payday #3 is the markup on the home plus the principal paydown. Our Associate agreed to a sale price of $356,900, which is a markup of $51,900. There was also $513 being paid toward the principal every month, which comes out to $18,468 in total over the length of the term. When you subtract Payday #1, the total for Payday #3 comes out to $34,368.

Add up All 3 Paydays™ and our Associate is netting $85,684! As you can see, the fact that the seller was in arrears barely affected this deal. And more importantly, he was able to provide a solution for everyone involved—making it a win-win-win. This is just one of many examples where those of us in the terms niche are able to help people out of sticky situations.