Seller financed down payment

34 Replies

Hi everyone,
Anyone know any creative ways to finance if the seller is willing to finance the 20-25% down payment?

I'm looking at a deal where Fannie Mae will finance 75% of the deal and the seller is willing to carry a second for the 25% down payment but FM will not allow te seller's second. I was thinking an owner equity deal maybe where the seller "buys" 25% of a new llc and pays the down payment for that percentage of ownership.

Any suggestion are appreciated!

Thanks

I've read a lot about this and banks nowadays do not allow a seller second and at the closing you and the seller will have to sign a paper that says there are no other loans in connections with the sale. One thing I had thought about was that depending on your relationship with the Seller, they would have to give you the money in advance and it will have to sit in your bank account for at least 60 days before you apply for the first mortgage. The money is now "seasoned" and it can be used for the DP and the bank does not need to know where it came from. As long as it is seasoned, it can be a gift. Clearly the Seller has to trust that you won't take off with his money. After the closing, you are free (I believe) to apply for a second mortgage or some other financing and as long as the original bank is in first position, I don't see why that have to know about it. You then give the Seller his cash and sign a mortgage/note and start paying him. It's not something you can discuss with the closing attorney but maybe others have experience with this situation. Good luck. 

I'd be interested in knowing if your suggest is doable Rob. Sounds like a good strategy, maybe so.

I love this strategy of having the seller hold a second. Does anyone have an example of this working with the new bank guidelines? 

Hi Brandon, 

No responses on this, , if you get any good answers your post let me know.

Thanks

A "gift" doesn't apply in non SFR financing, and if it did, it can't be from the seller, period. Also, it may be in your account for 60 days, but you're really going to lie on your loan app, saying it's not a loan? If you don't have the resources for the down payment on apartment financing, you have no business trying to buy them.

@Wayne Brooks it's not a matter of not having the resources. It's a matter of getting into a property with no money out of pocket. If the property cash flows and meets the buyer's investment criteria with 100% financing then it sounds like a good deal. There is no question on a loan application that asks where your deposit money comes from (to my knowledge). The originator wants to see two months of bank statements to be sure the deposit money is seasoned. They don't ask where the money came from. Is it 100% above board? No. Is a Sub2 deal 100% above board? Do investors skirt the rules as much as possible? Yes. I hope my comment didn't offend you in any way. We're all trying to make money here right? We're trying to be creative.

The loan application Does ask about any other debts/obligations being entered into relevant to the transaction, and of course about all other debts/loans.  You could "creatively" say the money from the seller isn't actually a loan until the closing occurs, therefore doesn't exist now, but I wouldn't hang my hat, or a$$ on that.

Originally posted by @Rob Beland :

@Wayne Brooks it's not a matter of not having the resources. It's a matter of getting into a property with no money out of pocket. If the property cash flows and meets the buyer's investment criteria with 100% financing then it sounds like a good deal. There is no question on a loan application that asks where your deposit money comes from (to my knowledge). The originator wants to see two months of bank statements to be sure the deposit money is seasoned. They don't ask where the money came from. Is it 100% above board? No. Is a Sub2 deal 100% above board? Do investors skirt the rules as much as possible? Yes. I hope my comment didn't offend you in any way. We're all trying to make money here right? We're trying to be creative.

 There absolutely is a question about the source of funds, and another about whether you have any debts not on your credit report, and another about whether there are any encumbrances on the property.

Fraud is not "creative."

The OP asked a question and I gave him an idea on how to solve his problem. I didn't realize I had offended so many people. My apologies. 

@Nate Bartow

The only way I've done the seller financing of a second mortgage is with small local banks where it's a commercial and portfolio loan.  And I had a good relationship and history with the bank. And good credit.

In addition, I had to have the downpayment up front from my own funds.  When we closed and the second mortgage was done, I was then reimbursed my downpayment funds (not all of them - it was 25% down and then the seller did 15%, so I was effectively in for 10% down).  All of this had to be fully disclosed and approved by the 1st mortgage lender.

It can be done, but I believe commercial loans and portfolio lenders are the key.

Good luck!

- Tom

@rob beland

No, but you were offering advice and other posters needed to caveat that you were advising the OP on a tactic that banks would consider fraud. That is something that you would want someone telling you if they were offering you advice on an issue you didn't know much about. Also, asking a seller to assume a non-collateral loan with no paperwork whatsoever to support the existence of such a loan would make recourse in the case default on such a loan extremely difficult for the seller. Tough sell even if you could convince the seller to conspire to loan fraud for little gain on their part.

It's not a matter of "offense."  It is a matter of really bad advice that could literally land someone in prison.  Should land someone in prison, a lot more than it actually does.

thanks everyone for the responses, all very informative but ultimately it has to be %100 on the up and up. Currently own over 100 units and another owner who works with my property manager wants to retire and is willing to get creative with te financing because of my relationship with te manager. Just trying to find a way to expand.

Good luck everyone! 

@Tom S.

Tom - as a fellow investor from VT, what bank did you use out of curiosity?

ok, here is a theoretical idea. I am new to this so don't take this as advice, more of a question. Could you and the seller form an LLC with the seller maintaining 20% ownership in the property. Then the seller is not a debtor, but has an equity position. Then after getting the loan and financing, the seller could be bought out at a predetermined buy out price (maybe after the property is capped out and refinanced.

Could this be a potentially legit strategy?

Originally posted by @Sean Price :

ok, here is a theoretical idea. I am new to this so don't take this as advice, more of a question. Could you and the seller form an LLC with the seller maintaining 20% ownership in the property. Then the seller is not a debtor, but has an equity position. Then after getting the loan and financing, the seller could be bought out at a predetermined buy out price (maybe after the property is capped out and refinanced.

Could this be a potentially legit strategy?

The seller has a property in a business entity? If not, he can put it in one. He'd be refinancing. He most likely will have a personal guarantee on that loan. Then you can buy into that business entity, being in that entity you can manage the property. An agreement to purchase the LLC shares can be adopted in the operating agreement. The seller can go on vacation, but will be on that loan until it is paid off unless a lender agrees to release them and take the new member as the sole borrower, not likely. Also, you can manage that LLC, be paid, earn your way in over time, but if you remove that seller from the LLC entirely as the owner of that property and the loan is made to the LLC and that "seller" a beneficial interest has been transferred and the lender may call your loan due, the "seller" needs to be in the LLC, but doesn't have to be active.

Refinancing is a different animal than buying, the LTV for a cash out refi will be lower, 70/60 maybe 50% with a bank, if they will do it at all. I suggest you not do your LLC purchase the day after the refi either, give it some time to cure so that your long range plan is not tied immediately to yesterday's loan. A member retiring is fine, moving out of management is fine, but you did represent to the lender that you were managing and active in that entity, they are giving "you" the loan.

Now, before folks get "creative" need to know what is legal, not guess and know what alternatives there are using inside the box techniques. Mentioned was the 10% down, 15% carry back by a seller and 75% from a lender, that is customary as a "purchase money" transaction.

When you mix bank financing or any agency that carries any federal loan guarantee you are subject to mortgage fraud issues. Mortgage or bank fraud is different from civil  or criminal customary fraud matters where intent for some financial gain might be required. With bank fraud , any statement or omission which misleads an insured lender in considering relevant facts concerning any loan or business transaction is evidence of intent, the lender does not have to suffer an actual loss. Not disclosing liabilities or contingent liabilities or expected liabilities known to be made in connection with a transaction or after that transaction has closed what was created from or in connection with that transaction can constitute fraud.

There is no way around it, on a loan application you are to provide your assets and liabilities. Any liability known to be incurred arising from the transaction is a contingent liability which is also asked. Next, point blank, the question, "is any part of the down payment borrowed", is on the standard 1003 application. A down payment can be borrowed in certain cases, but it must be disclosed and approved. Under IRS Code, all real estate transactions must have an accounting of all funding and expenses, single family residential are accounted for with a HUD-1, you can use the HUD-1 for commercial requirements but it's not required to be used. Not showing borrowed funds is not a proper accounting of a real estate transaction, so, you're in violation again. That will go to seller financed transactions where any lien is made in connection with that property.

Doing seller financing, you're not subject to banking regulations but to civil and criminal aspects of fraud, showing or telling a seller something that is not true can still be fraud in that transaction where that seller relies on the financial information given to determine if they should extend credit. The transaction still needs to be properly accounted for with seller financing.  Why not just have the seller do 100% financing and they may take additional collateral?

I prefer seeing an installment sale of a business entity, that can be structured hundreds of ways, it's not a real estate transactions but may have tax transaction matters and such are not made of public record until shown with the Secretary of State as officers/directors/members or  owners. :)     

@Nate Bartow

Update: I just found a local portfolio lender in my area that is willing to allow my purchase to include a seller financed 2nd position mortgage.  The only requirement is that I pay all closing costs and lender's $250 origination fee.  It would be wise to call all the local banks in your area and ask what type of loans they are looking to make on investment properties.  Chance are, like me, you will find one that is eager to do business with you based on this type of creative finance. 

The seller and I are having lunch today to discuss options and negotiate the terms hopefully.  Good luck with your deal. 

@Brandon Johnson

How did the deal go?

Did you close?

@Bill Gulley GREAT RESPONSE, as always. Where are you these days?


Originally posted by @Bill Gulley:
Originally posted by @Sean Price:

ok, here is a theoretical idea. I am new to this so don't take this as advice, more of a question. Could you and the seller form an LLC with the seller maintaining 20% ownership in the property. Then the seller is not a debtor, but has an equity position. Then after getting the loan and financing, the seller could be bought out at a predetermined buy out price (maybe after the property is capped out and refinanced.

Could this be a potentially legit strategy?

The seller has a property in a business entity? If not, he can put it in one. He'd be refinancing. He most likely will have a personal guarantee on that loan. Then you can buy into that business entity, being in that entity you can manage the property. An agreement to purchase the LLC shares can be adopted in the operating agreement. The seller can go on vacation, but will be on that loan until it is paid off unless a lender agrees to release them and take the new member as the sole borrower, not likely. Also, you can manage that LLC, be paid, earn your way in over time, but if you remove that seller from the LLC entirely as the owner of that property and the loan is made to the LLC and that "seller" a beneficial interest has been transferred and the lender may call your loan due, the "seller" needs to be in the LLC, but doesn't have to be active.

Refinancing is a different animal than buying, the LTV for a cash out refi will be lower, 70/60 maybe 50% with a bank, if they will do it at all. I suggest you not do your LLC purchase the day after the refi either, give it some time to cure so that your long range plan is not tied immediately to yesterday's loan. A member retiring is fine, moving out of management is fine, but you did represent to the lender that you were managing and active in that entity, they are giving "you" the loan.

Now, before folks get "creative" need to know what is legal, not guess and know what alternatives there are using inside the box techniques. Mentioned was the 10% down, 15% carry back by a seller and 75% from a lender, that is customary as a "purchase money" transaction.

When you mix bank financing or any agency that carries any federal loan guarantee you are subject to mortgage fraud issues. Mortgage or bank fraud is different from civil  or criminal customary fraud matters where intent for some financial gain might be required. With bank fraud , any statement or omission which misleads an insured lender in considering relevant facts concerning any loan or business transaction is evidence of intent, the lender does not have to suffer an actual loss. Not disclosing liabilities or contingent liabilities or expected liabilities known to be made in connection with a transaction or after that transaction has closed what was created from or in connection with that transaction can constitute fraud.

There is no way around it, on a loan application you are to provide your assets and liabilities. Any liability known to be incurred arising from the transaction is a contingent liability which is also asked. Next, point blank, the question, "is any part of the down payment borrowed", is on the standard 1003 application. A down payment can be borrowed in certain cases, but it must be disclosed and approved. Under IRS Code, all real estate transactions must have an accounting of all funding and expenses, single family residential are accounted for with a HUD-1, you can use the HUD-1 for commercial requirements but it's not required to be used. Not showing borrowed funds is not a proper accounting of a real estate transaction, so, you're in violation again. That will go to seller financed transactions where any lien is made in connection with that property.

Doing seller financing, you're not subject to banking regulations but to civil and criminal aspects of fraud, showing or telling a seller something that is not true can still be fraud in that transaction where that seller relies on the financial information given to determine if they should extend credit. The transaction still needs to be properly accounted for with seller financing.  Why not just have the seller do 100% financing and they may take additional collateral?

I prefer seeing an installment sale of a business entity, that can be structured hundreds of ways, it's not a real estate transactions but may have tax transaction matters and such are not made of public record until shown with the Secretary of State as officers/directors/members or  owners. :)     

@Charles A.

Sorry for such a late response, not sure how I missed this question.  The deal became a huge success for my first deal being a seller financed deal.   I have since done numerous seller financed transactions for my buy and hold properties.  33 units and counting...

See you at the top!

you can do a equity share just need to pitch the bank on the program. once they understand it you should be OK. the banks are loosing up a bit will take time. so best to go to a local S&L portfolio lender

I know I'm bumping an old thread, but...

Would it be possible to form a partnership in which you buy out 75% of the property from your new partner (the seller)? The partner's equity would remain in the property preventing the need for a down payment?

Shooting in the dark here,  but thought it may be possible. 

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