DSCR Loan with creative financing Hybrid. Is this allowed?

Question

Hello, I have a 6 unit residential property I want to buy in California. I was looking to acquiring it using owner financing since the owners own it free and clear but the owner will only do if I put 50% down. I mentioned this to a lender and said I could use a DSCR loan to give the owner the 50% down. This is where it gets a bit complicated. So I would buy the property with a DSCR mortgage with 50 percent down, I would use a hard money lender to get the down payment to satisfy the down payment requirement and after I get the DSCR funds then I would give the money back to the hard money lender and we would setup seller financing in a second position lien for the rest of the money that is owed.

Price: 600k

DSCR: 300k

Owner financing: 300k

If this is allowed I would basically be getting this property for a little over 30k and would be cash flowing over 2000 a month minimum but seems to good to be true. Any thoughts?

Robin Simon · Answer

Generally No - DSCR Lenders won't allow another loan securing the property

Erik Estrada · Answer

Do you have other real estate? There are some instances where you can do 65% LTV Hard Money 1st, 30% Seller second. But you would need experience and reserves to pull it off.

You can also do a 70% LTV 1st No Doc, No DSCR commercial loan, and have the seller finance 20% down.

Either way, you still need to have some skin in the game unless you do a cross collateral hard money loan. Then you could pull off a 100% CLTV with a seller finance

Caroline Gerardo · Answer

let me try again... what you are thinking is not possible, and you would have to commit fraud to execute.

$600000 sales price with 20% DSCR down real money PITI is $4365 you have no room with the $4300 rents to do 100% financing

No hard money or DSCR does 100% financing. You misunderstood or did not represent what you plan to do to your "lender." No lender does DSCR 100% combined loan to value. Your rents do not support it either.

Seller wants $600 or $650, whatever at closing not 325.

DSCR will not approve seller second to 100% CLTV at closing and seller isn't going to allow to be in second position. You give the seller a contract saying they are lending you $300000 in first position with 8 percent rate for x terms and condition, you actually plan not to honor this.  Seller will know from the settlement statement, the title company and escrow company that you do not have $300000 for the down payment. You will lose your earnest money deposit, appraisal fee and inspections and if you write in the offer that the seller will be the first lien then try to switch a roo at closing, the seller has the right to sue you...

Hard money lender is not going to do this. They could lose their $300000.

Lenders will ask to see your bank statement with $380000 + upfront showing.  How can you show that you had this $ in April and May 2023? At closing they require you show the wire transfer from your same account to title. If you do not intend to do this from the get go there is a word for it...

Eliott Elias · Answer

You can only use creative finance to finance the rest of the DSCR or Hard money equity. Neither loans will take second position on a property.

Mohammed Rahman · Answer

Hi @Horacio Castillo:

- Is your lender ok with you seller financing the remaining 50%?

- Is the seller ok with you financing initial 50% through a HML?

- is your HML ok with you taking additional note on the property after they lent you $325k against the building?

Each lender (bank, HML, and seller) will want to verify who is going to be first, second, third position lien holders.

Horacio Castillo · Answer

@Caroline Gerardo @Mohammed Rahman

To be more clear its 6 units:

The main goal is pay as little as possible out of pocket and acquire the property that will cash flow.

Total current rents: $4,304

The rents are way below market I can quickly as I take over increase rents by 10 percent(California limit on rent increase).

Total rent after increase: 4734.4

I can also do cash for keys and get way more.

If I buy the property for $650k

Lender said:

I can buy the property with a DSCR loan at 650k purchase price

but DSCR loan would require me to put 50 percent down which is 325k

The seller would agree to owner finance 50 percent of the price

With that in mind lender said I could use a hard money lender to satisfy the 50% down requirement so 325k from hard money, at closing that 325k would go straight back to the hard money lender so I am only borrowing it for 24-48 hours.

Then I would have 325k from DSCR loan they would be first position and we would create a second position lien with the seller to do the 325k owner financing.

Summary:

DSCR 325k loan over 30 years at 8.5% fixed:  $2,498 monthly

Owner financing of 325k at 0% over 30 years: $902 monthly

Insurance: $320 monthly

Taxes: $504 monthly

Total: 4,224 monthly

It would cash flow with the current rents and best of all I would only be coming out of pocket about 30k.

My concern is, is the using hard money loan to satisfy the down payment requirement legal? The lender I am speaking with says he can get me the DSCR loan and hard money loan.

Caroline Gerardo · Answer

Seller wants first position and DSCR lender wants first position.

Hard money lender is willing to do 100% financing? Hard money wont go above 75% combined loan to value in second position, or the first plus second minus the appraisal value.

I do not know DSCR lenders who will do 100% financing if in first position. When you go to refinance you still need the cash to pay down the loan.

For DSCR the property has to cash flow with the first, second, taxes and insurance. In California the rents generally do not cash flow with even 20% down because the value is so high.

To help you we need: the value of the property, market rents, how much cash you have, vesting, location...

Mohammed Rahman · Answer

Hey @Horacio Castillo - you should check with all parties whether they'd be alright with being in 2nd or in this case 3rd position lien depending on how you structure it.

Most times with owner financing, they're willing to finance it if the buyer brings a significant amount of cash up front.