Using Seller-Financed Land as Collateral to cover 20% DP for Construction Loan...?

Question

Hello BP Family,

I am looking to acquire land in Houston for first multifamily development project. I would like to know if I can preserve some/all of my liquid capital by avoiding an all cash deal for the lot/land.

My thought process is... Acquire the land through a seller-financed deal for the deed to the land and use it for collateral to cover the 20% down payment needed for the construction loan.

Once construction is completed and cash-out refinance complete I will pay off the seller I financed the land from.

Is this feasible?

Earl Burl III · Answer

Brian, thank you for this insightful answer! Very creative way to get the deal done. Definitely adding this to my notes/toolbeltI appreciate your "how can this work" mindset instead of only stating why it won't work.

Earl Burl III · Answer

Robert, thank you for the response. Looks like I will need to start with a smaller lot & build a single duplex instead of a larger lot and building multiple townhouses. This way I will have a bit more control of the deal.

Earl Burl III · Answer

Brian, thank you. I really appreciate the information. This is already helping me move in the right direction.

Brian Burke · Answer

I would start by asking the seller (or agent), "Are you (or your client) willing to entertain a joint venture?"  No sense in spending time writing anything if this isn't something the seller will do.

Earl Burl III · Answer

How would you best communicate this deal to the seller? Direct call/contact or work through realtor? Would you send over the offer terms in a seller-financing contract or send over the potential returns for seller based on analysis?

Brian Burke · Answer

I agree with Robert here, this is a very unlikely scenario.  The way this is more commonly done is to partner with the seller where they contribute the land to an entity that you manage (and the seller becomes a member).  Then the entity can borrow and use the property as equity.  You'll most likely still have to bring some cash to the deal for reserves and perhaps some soft costs, and any gap between loan amount and construction costs.  Then, when the construction is completed and the property sells, the land seller gets paid the value of the lot and typically some split of the profits in the deal.

Robert Rixer · Answer

Possible but in practice it would be tough to pull off. At acquisition the seller would be in first position on the property - you're then proposing to have him bumped down to second position by bringing in a construction loan. The bank will likely look very unfavorably to you having none of your own cash in the deal. The bank would also have to be okay with having subordinated debt on the property and the seller okay with being in 2nd position. Possible but very tough to pull off.