How Does Owner Carry Work ?

Question

I found a property I am looking at.   $1.5MM

25% Down would be $375K

It was suggested to me to speak with the owners (who I know - they are personal friends) about Owner Carry for $250K.

Does this mean A) The $250K is subtracted from the original purchase price and therefore I would have to come up with 25% of $1.25MM  or..

B) Out of the $375K down the owner would carry $250K and I would have to put $175K down on the deal ?

Bruce Harding · Answer

I am evaluating taking on a partner.

I don't have the T12 and all the numbers so I am waiting.

To do the deal myself I have $50K cash.  I would have to roll over my 401K into my IRA which would give me a total of $350K in that account.

I have Another IRA with $70K and the ability to get a loan against my home of $150K.

But might be easier to get a partner on the deal.

Thinking I probably could use someone with experience in evaluating the deal.  Was pouring over underwriting last night to see how finance and investment people view these deals.   What an eye opener.

I am very aware that I am short on experience and could use someone who could evaluate what reserves would be needed, any repairs that need to be done to the units (new appliances or painting etc..), value add ons etc...

Can't do that yet as I am waiting for the numbers from the private party.

I can buy this privately without a realtor on either side of the deal.  So that is another area where an experienced person would be a huge benefit.  And would be a benefit to all due to savings of tens of thousands of dollars.

Owner financing I think would be the answer.  Not quite sure how owner financing works exactly at this point but I am educating myself and asking questions.

Also going over real deals in the real world that involve underwriting which is teaching me how much I don't know.

Todd Dexheimer · Answer

@Bruce Harding the biggest trick will be to get a lender to allow this. I would begin talking to a lot of your local banks and credit unions to see what they will allow. If the property has a strong enough cash flow it may be workable. The issue you may run into is the 1.25 Debt service coverage ratio required. With only a small down payment, you may have a tough time getting there, but it never hurts to ask.

Jeff Kehl · Answer

@Bruce Harding option B is what I would do, but your math is off, you would bring $125k. Some lenders will allow this, you just have to talk to enough. It helps if you've already done business with them.

A more common way to get this done would be to find two partners and the three of you each put in $125k in equity.

Also, you don't mention if the property needs rehab but one thing to keep in mind, my experience is that your capital required to complete a large deal is not equal to the amount of the down payment.

Even if the property is in pristine condition, you need more money for third-party reports, professional fees and working capital.

Bruce Harding · Answer

Seth that is a great idea.  Had not thought of that.  Hmmmm.......

Seth Williams · Answer

It would really depend on how the rest is going to get financed. Typically, at least at my bank, they are going to want to see you put the cash in anyway, regardless of the seller hold back, so in this instance the 250k would just be a second mortgage, the bank would still be in first position on the loan, and still want you to put in 375k...Again, this is all depending on the bank so not every bank is the same.

Is the property free & clear right now? Ive had luck taking deals like this and turning them into more of a short term entire seller hold back  with as little as 5-10% down, and just making the note balloon in a few years. That way I can stabilize, improve rents, improve the property, and refinance.

Hope this helps!