As a mortgage broker, I can give you my experience on these types of transactions. There are primarily used by experienced and motivated sellers, investors in a market where financing is tight or hard to get. This might be the case for a market where there is too much inventory, or the seller wants to expand the pool of potential buyers and sell the property quickly. When it is done properly, it can be a great option. When done incorrectly, it can be a nightmare and I personally lost over $100,000 on one transaction so I know both the pro's and cons. That being said, would I do this again, absolutely! Here's what's in it for all parties:
Gets to sell their property quickly, particularly in a tight market where sales are slow.
Gets to make a profit on the spread between the Seller financed mortgage, and the mortgage due original lender creating positive monthly cash flow for the seller.
Seller may get certain tax advantages (varies depending on each deal).
Gets asking price for property with equity monetized but deferred until original mortgage payoff.
Gets to close quickly.
Convenient Seller financing.
Property titled in buyer's name.
What to Watch Out For:
The 'Due on Sale Clause' - which means lenders may not want to go along for the ride with this type of transaction so they can 'call' the entire loan balance at once, and demand full payment within a short period of time under what they consider a 'breach' of the original agreement. Based on my experience, lenders usually do not do this if the payments are made as agreed, but they do have any and all rights to protect their investments.
Make sure you get a balloon note in the transaction, meaning that the AITD will have to be paid in full in 3 to 5 years. This is good for he seller because you know in advance if everything is going that you will be getting your equity out in 3 to 5 years. Hopefully, the market will have improved by then and your mortgage note will be more vlauable as evidenced by the timely payments of record, and the increased market value of the property. If the market goes lower, then you're screwed because you'll be upside down meaning you owe more than the property's worth, and your buyer may casually walk away, in which case you'd have to foreclose.
Buyer's in this type of transaction have been taken advantage of when seller who received payments, basically took the money and failed to pay their original lender. The original lender forecloses, and you (the buyer if this is you) could be evicted, losing all you have paid.
This type of transaction works really well when there is a third party servicer (usually an escrow company) who will agree to service the AITD for both the seller and the buyer, collecting a small fee each month for their services. Buyer makes payment to servicing escrow company, escrow makes payment to original lender, and forwards the remaining monthly balance to seller (positive cashflow). This goes on for usually 3 to 5 years or until the balloon note becomes dueuntil the buyer refinances and pays off the AITD and note. At this point, the seller gets the lump sum of their equity in cash at closing, and buyer gets a new loan. Refinancing is usually not a problem if the market is stable, and all payment have been made on time.
As a mortgage broker, I loved these types of deals because they were transactions I could count on for future revenue in the near future. Some of the deals involved the buyer electing to sell the properties instead of refinancing (which was good for the realtor). In this case, I was appreciative if the realtor referred me their new buyer for a mortgage pre-approval which I usually did with a Government GSE automated underwriting product from FreddieMAC or FannieMAE in about 15 minutes.
Seller gets positive cash flow, and cashout for equity 3 to 5 years out. Get expert advice on structuring the deal and use a third party servicer - escrow of payments and disbursements.
Buyer gets to close quickly in market where financing make be challenging but due to a stabilizing or slowly improving market, chances for financing will improve in the future.