Second Lien Position

3 Replies

Hi, do commercial lenders generally allow the seller to carry back in second position the 25% not financed by the lender (to effectively create a purchase with no money down for buyer)?

I would say they allow it but not generally. I've done it a few times in the past couple years but there were extenuating circumstances. Both banks I used have known me for quite awhile and they know that I'm experienced and would not enter into the deal if it didn't make sense for me and them. 

Two deals I bought way below market value and they knew I would be rehabbing and putting them into a more than 0% equity position. Both properties now have a 20%-30% equity position for the bank.

Another one I did, I was not going to do much to increase the value so I put 15% down and the seller held a second for 10% so that I had some skin in the game.

Also keep in mind that it is hard to cash flow something that's 100% financed. I find that sellers are fine with 5-10 years but most don't like longer than that. One of my properties with a 5 year 20% second on it is fairly high cash flow negative on paper and so far somewhat cashflow negative in reality. I am ok with that though because I can cover it with other properties and in 4 years it will be a good cash flow property.

Think of the commercial banker as your business partner. If you can make a deal work so that they're safely making a good return they should be fine with it.

Possibly a Personal note through an/the property LLC for the DP? Think outside the box and I agree with Jeff. Treat your commercial banker as a partner, treat their money like your money. Prove that the numbers make sense and will work for them!

Typically, no. Good luck.