jersey city, NJ · Member since 2018 · 47 posts · 2 votes
If I only have 20% and banks are requiring 30% for a down payment, and I have no reserves after the down payment but the seller is willing to hold a note, whats the best structure for that deal to be made?
1) I remit 20% and the seller holds the note for the balance? Interest only?
2) I remit 20% to the bank and the seller holds a 10% second mortgage interest only?
There is no "best" way since there are bunch of ways to structure a note depending on the your and the seller's goals. How big of a property are you talking about and what's the NOI?
-Will the bank let you fund the down payment with a second and no cash reserves? Does the property cash flow enough to support this?
-What's the minimum amount the seller will take as a down payment? I wouldn't want to buy a MF without at least some reserves so 20% down probably isn't the best play.
-In general I'm not the biggest fan of IO notes unless you know for a FACT that you can get financing and/or you'll use the excess cash flow to add value. Also IO dosn't really help the seller since he still will have a big tax bill at payoff.
-What amortization will the NOI support? 10, 15, 20...? If this is a core asset I'd go with the shortest term possible to make refing with a bank easier. Value add gives you some more options, but with both be careful of exit cap rate projections being to rosy.
Rental Property Investor · Brattleboro, VT · Member since 2015 · 204 posts · 174 votes
8y
if you only have 20% with no reserves then it isn't likely the bank will give you the loan even if the seller carries 10 because with no reserve you have no margin for error if something goes wrong.
if the seller is willing to finance 80% that could work, but you would still have closing costs and it is very risky to buy a property and have no reserves if something goes wrong. and if the seller is smart he will ask for proof of funds and when he sees you'll have nothing left after you give him 20% he'll back out of the deal.
There is no "best" way since there are bunch of ways to structure a note depending on the your and the seller's goals. How big of a property are you talking about and what's the NOI?
-Will the bank let you fund the down payment with a second and no cash reserves? Does the property cash flow enough to support this?
-What's the minimum amount the seller will take as a down payment? I wouldn't want to buy a MF without at least some reserves so 20% down probably isn't the best play.
-In general I'm not the biggest fan of IO notes unless you know for a FACT that you can get financing and/or you'll use the excess cash flow to add value. Also IO dosn't really help the seller since he still will have a big tax bill at payoff.
-What amortization will the NOI support? 10, 15, 20...? If this is a core asset I'd go with the shortest term possible to make refing with a bank easier. Value add gives you some more options, but with both be careful of exit cap rate projections being to rosy.
jersey city, NJ · Member since 2018 · 47 posts · 2 votes
8y
I understand the feedback. I should be clearer. I have several other properties which cash flow with equity. So with that being said, and having run the numbers on the subject property cash flowing with 30% down I’m trying to find the way to bridge through the sale without selling another holding but perhaps to refi the reserves out or do a 2nd mortgage on another property.
jersey city, NJ · Member since 2018 · 47 posts · 2 votes
8y
Would there be any reason for seller and I to propose I remit 20% to him directly as a down and he hold the 1st mortgage for 3 years say interest only. Defer taxes and buy me more time to pull cash out elsewhere or strategize. Whatever the agreement wouldn’t it come down to the sellers cash needs?
Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
8y
@Michael Willis the specifics of term, down payment, amortization will need to be hashed about between you and the seller. I don't know his needs so its hard to say.
He may not go for IO if he wants to reduce his taxes, but its all part of the negotiation process.
jersey city, NJ · Member since 2018 · 47 posts · 2 votes
8y
Fair enough Bill. That’s what I get when a sellers agent says to me to explain to the seller the benefits of seller financing and gives me nothing else. Input appreciated.