Seller 2nd Mortgage as part of down payment?

Commercial Real Estate Investing
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Seller 2nd Mortgage as part of down payment?

Scott W.
Investor · Cleveland, OH · Member since 2016 · 30 posts · 1 vote

Hi All-

Does anyone have any experience (or worked with any lenders) where the Seller takes on a 2nd mortgage as part of the down payment amount?  For example, buying a $4M property that normally requires 25% ($1M) down and the other 75% ($3M) as a first mortgage -- are there lenders that will allow for a $3M first mortgage, a $500K cash down payment and a Seller carried 2nd mortgage of the other $500K.  The Buyer still has skin-in-the-game and the 1st mortgage holder is still in first position with the same risk that they normally would have on the property.

Any help would be greatly appreciated...

Thanks...

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Douglas SkipworthBusiness Member
Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
10y

Hi, @Scott W.

I have personally done several deals where the bank does the first mortgage and the seller carries the second mortgage and I put nothing down. 

I agree with @Derek Carroll.  It all comes down to your experience and your relationships.  

But, there's no doubt that it's 100% doable.

Best of luck to you!

Investor's Guide to Memphis Real Estate
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  • Eric Schleif
    Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
    10y

    Possible, yes. Ideal, no. Bridge lenders would look at this more openly than a traditional bank. The seller's second would have to be very soft. Your payments on the sellers second will decrease your cash flow and lower your proceeds if the deal is tight. What's the asset type? If its a multi-family deal there is 80% LTV money out there. You could avoid the seller financing all together.

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  • Eric Schleif
    Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
    10y

    Scott, I just read your profile so i'm guessing the asset is commercial/office so forget what I said about 80% LTV. I'd imagine banks are going to be skittish on the seller 2nd, but no harm in trying. We got around this same issue on a large commercial deal down in Memphis by having the seller agree to take a preferred equity position instead of carry a 2nd mortgage. Good luck.

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  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
    10y

    I think your question is searching for a way into the deal with a limited out of pocket downstroke. If this is indeed the case then yes its very doable. 

    Lenders who will lend on this structured finance purchase will most likely require the buyer to have at a minimum 10% of the purchase price into the deal in the form of a capital downpayment. The Seller carry will need to make up the difference between the buyers capital downpayment and the lenders required downpayment e.g. 20, 30, 40%, etc. The deal will also need to cover DSCR (if it doesn't, try getting the Seller to carry the 2nd where interest accumulates with no payments due until a balloon payment date in the future; be careful, know you have an exit when it balloons).

    My interpretation is that @Eric Schleif is looking at this from the perspective of a CRE lender whose job it is to obtain the very best financing package for his clients. He's correct its not the best in terms of outright lending options.

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  • Scott W.
    OP
    Investor · Cleveland, OH · Member since 2016 · 30 posts · 1 vote
    10y
    Originally posted by @Christopher Telles:

    I think your question is searching for a way into the deal with a limited out of pocket downstroke. If this is indeed the case then yes its very doable. 

    Lenders who will lend on this structured finance purchase will most likely require the buyer to have at a minimum 10% of the purchase price into the deal in the form of a capital downpayment. The Seller carry will need to make up the difference between the buyers capital downpayment and the lenders required downpayment e.g. 20, 30, 40%, etc. The deal will also need to cover DSCR (if it doesn't, try getting the Seller to carry the 2nd where interest accumulates with no payments due until a balloon payment date in the future; be careful, know you have an exit when it balloons).

    My interpretation is that @Eric Schleif is looking at this from the perspective of a CRE lender whose job it is to obtain the very best financing package for his clients. He's correct its not the best in terms of outright lending options.

    Thanks for the input and yes - i am trying to limit the out-of-pocket downstroke from the usual 25% to ~10%-15%. It's an office complex that i'd be entering at a 10-11% CAP with under market rents so cash flow should cover requirements. Do you know of any lenders that I can reach out to that you think would do a deal like this?

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  • Derek Carroll
    Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
    10y
    Scott W. It's certainly possibly. I've quoted deals where the borrower only comes in with 5% equity by using a seller second. It's rare to find a bank that will be that aggressive though At 10% equity injection many more banks were interested.
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  • Scott W.
    OP
    Investor · Cleveland, OH · Member since 2016 · 30 posts · 1 vote
    10y
    Originally posted by @Derek Carroll:

    Scott W. It's certainly possibly. I've quoted deals where the borrower only comes in with 5% equity by using a seller second. It's rare to find a bank that will be that aggressive though

    At 10% equity injection many more banks were interested.

     Thanks.  So you think it's doable with a 10% cash down payment and a 15% Seller Carried 2nd?  

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  • Derek Carroll
    Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
    10y

    i think you have a shot.  I broker loans and I'm a direct lender.  When I'm brokering my thought is you wont know unless you ask and i'd recommend you take the same approach.  

    it has to be a strong deal and ideally you're experienced in this property type but yes some of the banks are getting very aggressive.  I think last time i worked a deal like this maybe 2-3 out of 10 banks were not opposed to the idea.  

    1Reply
  • Scott W.
    OP
    Investor · Cleveland, OH · Member since 2016 · 30 posts · 1 vote
    10y
    Originally posted by @Derek Carroll:

    i think you have a shot.  I broker loans and I'm a direct lender.  When I'm brokering my thought is you wont know unless you ask and i'd recommend you take the same approach.  

    it has to be a strong deal and ideally you're experienced in this property type but yes some of the banks are getting very aggressive.  I think last time i worked a deal like this maybe 2-3 out of 10 banks were not opposed to the idea.  

    Thanks for the input. Going to visit the property in the next 1-2 weeks -- if all looks good, will submit LOI (already know minimum price Seller needs to be at and it works well within my math/criteria) and put the property under contract. If accepted, i will reach out to see if you can help on this deal.

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  • Douglas SkipworthBusiness Member
    Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Hi, @Scott W.

    I have personally done several deals where the bank does the first mortgage and the seller carries the second mortgage and I put nothing down. 

    I agree with @Derek Carroll.  It all comes down to your experience and your relationships.  

    But, there's no doubt that it's 100% doable.

    Best of luck to you!

    Investor's Guide to Memphis Real Estate
    View Page
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  • John Menton
    West Bridgewater, MA · Member since 2017 · 81 posts · 14 votes
    9y

    Has anyone had any luck with this strategy in Massachusetts? Not sure what the REI friendly banks are around southeast MA...

    Keywords: Boston, Quincy, Bridgewater, Brockton, Plymouth, Providence, Fall River, New Bedford, cape cod, 

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  • Jimmy MurrayBusiness Member
    Investor · Warwick, RI · Member since 2013 · 220 posts · 119 votes
    9y

    @John Menton I have heard good things about Bay Coast Bank as well as Pawtucket Credit Union in the commercial arena in Massachusetts and Rhode Island

    [email protected]401-829-1533
    Lyon Property Group4.5632 Reviews
    WebsiteView Page
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  • Jesse Andrews
    Investor and Licensed Agent · Glocester, RI · Member since 2012 · 90 posts · 26 votes
    9y
    John Menton I actually just had this conversation today with my bank. They're a local RI bank. They are offering sub 6% rate and 20 year amortization. If the deal makes sense they'll entertain an owner second if you have some skin in the game. They're also looking for a 1.5% DSCR. Message me and I'll give you the contact information. Good luck
    0Reply
  • Craig Garrow
    Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes
    9y
    Definitely possible! Right now, I'm working on purchasing a triplex and getting the seller to carry back 15% and using some Seller's Concessions additionally! :)
    0Reply
  • Michael Healy
    Investor · Great Barrington, MA · Member since 2015 · 153 posts · 39 votes
    9y
    I did this in the fall on an 8- unit building with 15% equity down and 15% seller financing 20 year amortization 6% interest and 5 year balloon. Local commercial bank lender was fine with the transaction.
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  • John Menton
    West Bridgewater, MA · Member since 2017 · 81 posts · 14 votes
    9y
    Craig Garrow Michael Healy that's awesome to hear, congrats! I'm still searching for my first deal but this will help me stretch my 50k down payment even further if I can get a seller to carry 10-15% and still get bank financing.
    0Reply
  • Martin Ruiz
    Real Estate Agent · Los Angeles · Member since 2015 · 36 posts · 4 votes
    6y

    @Derek Carroll looking for an option in escrow with a buyer who was getting down payment assistance and the guidelines changed on him and options for a 2nd to help?

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