Seller financing with construction loan involved?

Question

Hi,

I negotiated on a house, we came to an agreed price with the seller, and then the seller backed out. They went as far as to take the listing off Zillow!

The issue was that the seller is concerned the proceeds will not suffice to support his dad's retirement.

Unfortunately, I am not willing to bid more on the house.

I would like to offer the seller an alternative - A higher price, but with a balloon payment.

However, a lender told me they will only approve it if they're first in line on the liens.

I highly doubt the seller will subordinate their lien to a construction loan, especially when it's his old man's retirement.

How do you navigate this?

Matt Devincenzo · Answer

Seems like your next option would be creating an entity with the seller owning a percentage, and then you negotiate a structured buyout in advance. The question is do you have a track record that would give them confidence in your ability to perform? Your construction loan is in first position and they are a shareholder in the property via the entity eliminating the seller financing structure.

Patrick Roberts · Answer

Need more info. Whats the expected construction cost, the exit plan, and the proposed financing? How big is the gap between what youre offering and what the seller wants? How long would they need to carry their lien for?

Being that retirement for the dad is the underlying motivation, this might actually be a situation well suited to seller financing. That being said, I would not offer to pay more just because of seller financing. I would highlight to the seller that even at the same price, they will be paid more in the aggregate because they will be collecting the interest that you wouldve otherwise paid to a bank/lender.

Could you potentially reduce the downpayment and finance the construction in cash or with an additional personal, unsecured loan?

Any private lender is highly unlikely to go into 2nd position behing seller financing, and most are not going to want to have a seller finance lien involved at all. Trying to get loans from both parties will make this deal much more difficult.

Patrick Roberts · Answer

Doesnt seem like this would work with the seller staying in first position.

Ron S. · Answer

Property been on the market for a while, started at over 600, they lowered to mid 500s then lowered to high 400s.We agreed in the high 300s after a few rounds of counter offers. We agreed around 90k below listed price.The building does come with its issues, and we couldn't justify list price. It has existing tenants and paperwork issues (verbal month to month lease), parts of it are distressed and cannot be inhabited right now, etc.Renovation costs would be high, around 800k. Can build 7 residential units. We'd maintain the existing building but build an expansion of parts of the lot that are underutilized.Exit plan is rent out and DSCR.

Bo Smith · Answer

Seller financing with balloon payments gets tricky when construction's involved. One angle - have you considered splitting the deal? Keep the land portion as seller financing (they stay in first position) and get a separate construction-to-perm loan for improvements only. Lender gets first on the construction lien, seller keeps priority on the land. What's the timeline on the balloon you're thinking?