First owner finance deal question

5 Replies

Hey all,

Looking to purchase my first MHP and as I presented the LOI to the bank and how the deal was structured they weren't too thrilled that I was looking to have no money in the deal. Here's how it was structured on the LOI to the seller:

$1,250,000 purchase with 80% bank financed and 20% owner financed. $1,000,000 bank financed and $250,000 owner financed.

Even with the bank being in first position, they saw the seller financed portion as the seller being in 2nd position, and if we were to be foreclosed upon, then the seller must be paid back their note by the bank before the property could be taken possession of. I guess the bank is looking at it like, if they loaned $1,000,000 and then we didn't perform, they'd then have to pay the seller $250,000 and would be at a loss.

Then, I thought, well what if the 2nd mortgage wasn't secured by the property but was an unsecured promissory note between buyer and seller, where we were only personally obligated to pay the note...

Just curious what others do in this type of scenario, haven't presented anything to the bank yet.

Yeah, @Ken Nyczaj , many (most) commercial lenders are not comfortable with you being 100% leveraged. You can certainly shop around, but don't get your hopes up. If you're planning some value-add/forced appreciation, that may help get the bank more comfortable...or it may not.

I'm not following the foreclosure procedure you outlined. The whole point of being in first position is that lender gets what they are owned...first. They absolutely do not have to make the 2nd position lender whole before getting paid back themselves. Sounds like there is some confusion here.

That said, 100%-financed properties are a lot riskier than those with 20-25% down. The bank has legitimate concerns.

An unsecured note from the seller, may be an option, but I'd never accept that, if I were the owner.

Have you considered bringing in a capital partner on the deal?

@Jaysen Medhurst thank you for clarifying that, I'll ask the lender what she meant by paying the 2nd position before getting paid.

We've considered it but with a team of already three people we'd like to keep it at that, at least for our first MHP. And the owner seemed interested in 5% interest which would be a great rate for this deal if we can move forward, which would likely cost us less over time than a capital partner.

Good luck, @Ken Nyczaj , let me know how it goes. At the very least, reach out to some other lenders. Out of curiosity, if you're not all kicking in some cash and this doesn't seem like a value-add play, why are there 3 partners involved at the outset? What is each person bringing to the table?

@Jaysen Medhurst it is a value add play, just the owners didn't seem to want to budge off the asking price at all, and at the price the returns aren't great, but with no money or low money in the deal, it does make sense at full asking price, especially with IO on the secondary note for the first few years to help stabilize cash flow. We are over paying for the park but with the debt service so attractive, and with it underperforming, we may buy at a 7 cap but feel we can move it to a 10-12 cap in only a few years by decreasing expenses and increasing income with little risk in the deal as we don't have much cash in the deal. It's not underperforming with vacancy, only very low rents and high expenses.

Each of us work well together and have been doing so on other single family flips and rentals so we figured to keep the team together. Acquisitions, Project Manager, Property Manager.

Sounds like there's opportunity there and it makes sense to stick with a team that's been working, @Ken Nyczaj . One thing to consider as you're talking to banks: "...with little risk in the deal as we don't have much cash in the deal." This is exactly the reason lenders are going to be nervous. You don't have anything to lose, so there's nothing stopping you from just walking away if the deal goes sideways. You may also run into trouble with the DSCR at 100% financing and a 7% Cap Rate.