How to Structure My Creative Finance to Purchase a Duplex

Question

I found a deal in my local market here in Baton Rouge where a seller is willing to sell his duplex, that is not currently on the market and he is open to possibilities of carrying a note for a small portion of the purchase price that would reduce my down payment.  This would be in addition to the primary mortgage for the 75%-85% of the sale price that I imagine would come from a small local bank.

His asking price is $125,000 for a duplex that rents for $875 & $895 on two 3BR/2Bath units totaling 3000 SF.  Not exactly the 2% rule, but my analysis shows I should cashflow at least $500/month under 100% financing under several scenarios I evaluated.  Coming up with down payment funds is my biggest roadblock which is why this deal appeals to me even though it is not a 2% rule type steal of a purchase price.  He cannot owner finance the entire deal because he currently has an outstanding mortgage on the property that must be settled in the sale.

The seller and I have not discussed yet what the terms of the seller financed portion would be because my biggest uncertainty is the question of how do I present this to the bank?  Are there banks open to providing a new mortgage for a property where the seller is providing a large portion of my down payment in the form of a note to me?  Is this only done on commercial transactions?  Does anyone have any recent experience structuring a deal like this? I know @Ben Leybovich is the creative finance expert and I would be grateful to have his input here.

Also is Lending Club a good option to get my down payment money?  Would a bank have a problem with me getting my down payment funds that way?

Thanks in advance to the Bigger Pockets community.

Brandon Johnson

Brandon Johnson · Answer

@Sammy Lyon I found a local portfolio lender willing to do the deal and the seller took a second mortgage for the 20% down payment.  It only cashflowed about $300/month for a while until I paid off the 2nd mortgage about 2 years later and that instantly increased my monthly cashflow by another $485.

Both mortgages were put in place at closing.  Our title attorney, who happened to be very investor friendly and specialized in creative real estate transactions, drafted the contract language, the mortgage and promissory note for the seller.  A good, investor friendly title attorney is very important and you really just have to get on the phone and start calling small community banks until you find one willing to do this type of loan.

This was a duplex, and I asked the seller if he knew anyone else wanting to sell and he ended up connecting me with another seller of a fourplex that ended up being my second deal and was purchased with the exact same structure, loan terms and with the same bank.  I'm always sure to ask my sellers if they either have any more properties they would like to sell or if they know anyone else wanting to sell.

If I could go back and do it over I would have structured my seller finance note terms better in my favor if I could have.  Seller financed around $22,500 for 5 years at 7% interest.  The 5 year term really diminished my cashflow and if I could go back and structure differently I would have tried to negotiate at least a 15 year amortization with a 5 year term, as in a balloon payment due at the end of the 5 years.  I didn't know any better at the time as I was just learning what a balloon payment was!

It all worked out for me because I had a full time job at the time making over $100k/year so I wasn't depending on the cashflow, I just wanted in to this game and I wanted in badly even though I had no money to put down on the deal at that time.  I'm still paying on the 2nd mortgage on the second deal that was the fourplex, but it cashflows and real estate became my full time endeavor and source of income.  The J.O.B. income along with perfect credit was a huge factor in being able to pull off the bank financing at that time.  I was able to establish relationships with several small community banks in the coming two years before I left my job, and because of those relationships and the success I demonstrated, I was able to continue buying and refinancing properties with those banks without a J.O.B.

Since those deals I have made my niche in no money down investing and using OPM exclusively.  I've done several 100% financed seller finance deals since those first couple deals, but all came from other investors rather than motivated homeowners.  I got up to about 30 units in two and a half years and with that in place I now pursue another business venture that I'm most passionate about. I also put the BRRRR rehabbing know how to good use and flip several houses a year for additional income.  For me, real estate was always intended to be a tool to get me where I wanted to be, which meant not having a J.O.B. ever again and having the time and financial freedom to pursue other interests and other ways of creating income.

I did sort of update this on another similar post that was started by someone else and I didn't realize this one was still lingering with the end of the story untold.

https://www.biggerpockets.com/forums/432/topics/186918-seller-financed-down-payment

Good luck with your deal.  Post back here and keep us updated on your success!

Spencer Wenger · Answer

Brandon,

It sounds like you're interested in some good cash flow. This also could be an opportunity to bring on a joint venture partner. This is someone to purchase the property up front for you, and then you offer them their money back PLUS a percentage of the profits when (if) you sell it as a turnkey rental property.

Also, to follow the advice of John Herrick, I would ABSOLUTELY get my hands on some unsecured lines of credit working in my favor. In your scenario, once you have the owner finance portion spelled out, you can offer down payment money from your lines of credit. Then, as the property is cash flowing, you can pay off your lines of credit from your rents. Like John said, I am more than willing to guide you through this process, as I am currently using the said credit lines to assist in financing flips and rehabs (2 flips in Columbus, 1 in St. Mary's, Ohio, 2 rentals in Columbus). email: wengers217@gmail.com; phone; (330)749-1686. It is making a major difference in my investing career.

John Matthews · Answer

@Brandon Johnson

So I'm not a mortgage expert, but I think most banks won't be comfortable with them holding a big note on the property. You may be able to get a small, portfolio lender to do it, provided it's a second position note though. I think you'll spend quite a bit of time asking around though.

Is it a good deal though? Are you buying well under market? If you are, then you can likely find a hard money lender / bridge lender willing to do the deal though it'll take some digging. If you network you can probably even find a private lender do it if the deal is good enough.

I do know one thing though, banks will not allow you to use loan money as a down payment...unless it's seasoned. So if you take out a loan, from anywhere (lending club, say) once that money has been sitting in your bank account for 60 days, you can use it, it's yours. As long as your DTI is below the banks required max (around 0.4-0.45). You may also be able to use gift money as long as the giftor can show they had the money for 60 days.

I'll bring @Ben Leybovich into this one, but I can tell you what he'll say: you can't use creative financing to make a bad deal good, but you can use it to make a good deal great.

Eric Adobo · Answer

Ben is a good one.

I'll go further if you need to go Funky you probably aren't ready to do a BUY.

Not saying creative is bad..... It depends.

Think about it banks have standards. They got lawyers. They got actuator.

Chris Bluem · Answer

@Brandon Johnson this was a great read for me and very appreciated. I am in a similar boat as you were two years ago and reading your story is very inspiring. If you dont mind, I may PM you with a few questions as I look to get started. Thanks again!

Sammy Lyon · Answer

@Brandon Johnson super helpful and informative...thanks for taking the time to update your story! Makes a lot of sense. I love it.

Brandon Johnson · Answer

@Sammy Lyon that is correct, the bank loaned 80% of the purchase price and the seller essentially deferred receiving the other 20% of the sale (his equity in the property) because he became the bank for the other 20%.  So I paid the 2nd mortgage note "to him" is the answer to your question.

I made monthly mortgage payments directly to my seller who no longer owned the property, but held a 2nd position mortgage and promissory note just as the bank held a 1st position mortgage and note.  It's a lot riskier for the 2nd position because if I quit paying the bank and the bank foreclosed, the seller in 2nd position would not stand as good a chance of recouping that money.

I also signed a personal guarantee to both the bank and the seller since I purchased in an LLC.  The important thing is that the seller has to have a lot of trust in you and faith in your ability and likelihood of repaying the debt.  From my perspective, my name and reputation were on the line and at the end of the day if something went wrong and the bank foreclosed, I would have still done everything in my ability to make my "Private lender" whole and repay that debt.

This was another investor, so he approached it with an investor mentality.  He was going to make 7% interest on his equity over the coming 5 years.

Another detail I left out is when I paid off this 2nd mortgage three years early, I made a proposition to the seller and successfully negotiated a discounted payoff.  It amounted to about $1500 discount he was a little reluctant to agree to, but he obviously was ready to receive that lump sum.  The lesson here is if you don't ask, then the answer is automatically NO.

Sammy Lyon · Answer

wow @Brandon Johnson -- inspiring!

If I'm understanding this correctly, you went out and got a mortgage from a portfolio lender for 80% of purchase price.

The seller got a 2nd mortgage (on a property he was about to no longer own?) to cover the 20% down payment required by the portfolio lender, and you paid his 2nd mortgage for him (or to him?) on top of your debt to the portfolio lender. (And still cashflowed!)

Apologies if my questions are super basic, I'm just trying to understand the concept so I know what I would be asking lenders. First, I would want to be able to explain it to a seller in a way that's a win-win for both of us. Thanks for the explanation and advice - very inspiring and creative!

Sammy Lyon · Answer

@Brandon Johnson hi there, came across this researching seller financing. Curious if you have any updates on this deal, years later!

Brandon Johnson · Answer

@John Matthews Herrick

@Tom Cyr

Thanks guys for all your advice.  I just found a local portfolio lender that will allow the purchase to be made with a seller financed 2nd position mortgage.  I am having lunch today with the seller to discuss.  Tom, I am not looking for huge appreciation from this property because I don't expect it to appreciate very much.  The cash flow is what I am currently after.  It is priced at the top of the market for this neighborhood based on comparable sales, but it appears to be one of the nicest properties in this neighborhood so the price is supported by the comps and the condition of the property.

Hopefully I will be reporting back in the success stories section with my first creative finance deal because I plan to get in with zero of my own money here.

How to Structure My Creative Finance to Purchase a Duplex

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