Seller financing understanding.

4 Replies

Good morning BP community. My question today is on using partial seller financing and a private lender, I would like to know if this general example would work . (Not real numbers)

So I recently found a deal for a cashflowing apartment for 100k. The seller owns the property free and clear. Seller is willing to seller finance for 20% down which will  be 20k. Now all the numbers workout and is a good deal but I dont have 20k laying around. So what I plan to do is get a loan from a private money lender for 20k. Now once I have the loan from the private lender I open up a 1st mortage using the 20k, then I open up a 2nd mortage for 80K using seller financing and close on the deal. Of course I know that the cashflow has to be able to pay both. What I am asking is if this structure can work. What are your thoughts.  

Unlikely as both lenders will want a first lien. I'd say if your private lender would take a second, the seller may not care, but he certainly wouldn't if he had to cough up his down payment to secure his 80% loan! Maybe if the private lender is mom or dad, a business type person wouldn't really go there, unless it was a screaming hot deal, and it probably isn't. Your management abilities and experience will have a lot to do with such arrangements too. :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

That would work, except I just want to simplify the process overview. Your private lender will have to deliver 20k cash at closing to pay the down payment to the seller. Your title company attorneys will be drawing up a deed of trust and promissory note (1st mortgage) for the 80k seller financing loan and then a 20k ( 2nd mortgage) Promissory note for the 20k with your private lender. The reason is the seller would not be willing to take the 2nd mortgage since they would lose first rights to foreclose if you defaulted on payments. The smaller lender usually takes the 2nd place. Since this is all private/ seller financing, its up to you to negotiate the terms of financing with your counterparts. There is lots of nuances and ways to negotiate the best seller financing terms, so I suggest you post back when you are close to a deal and hit up the BP community with sample terms you are thinking about to see if your seller financing terms are considered good. Can you get the seller to agree to a long term, low interest rate, perhaps 2 month grace repayment period after closing to perform repairs and place paying tenants, and other benefits? 

Originally posted by @Jeff Bridges :

That would work, except I just want to simplify the process overview. Your private lender will have to deliver 20k cash at closing to pay the down payment to the seller. Your title company attorneys will be drawing up a deed of trust and promissory note (1st mortgage) for the 80k seller financing loan and then a 20k ( 2nd mortgage) Promissory note for the 20k with your private lender. The reason is the seller would not be willing to take the 2nd mortgage since they would lose first rights to foreclose if you defaulted on payments. The smaller lender usually takes the 2nd place. Since this is all private/ seller financing, its up to you to negotiate the terms of financing with your counterparts. There is lots of nuances and ways to negotiate the best seller financing terms, so I suggest you post back when you are close to a deal and hit up the BP community with sample terms you are thinking about to see if your seller financing terms are considered good. Can you get the seller to agree to a long term, low interest rate, perhaps 2 month grace repayment period after closing to perform repairs and place paying tenants, and other benefits? 

 I see. Thank you 

The thing I see about this deal and what you are thinking is this;

. The owner if fine with waiting if they offered you Owner financing. However how about your private lender. He is mostly likely not wanting to wait long before he gets his money back along with a gain. Will you have the money to pay back the private lender you are thinking of and if so by when and will you also be able to offer them, he or she a gain in cash?

You also did not mention what is the plan to improving the cash flow or increasing the value or essentially build equity into the property. There is allot you have to think about beyond simply getting the money to buy this property. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you