Equity Line of Credit on Owner Financed House

11 Replies

I am looking to acquire a $500k 6 unit apartment building. One of the options to purchase the property it through owner financing ($2,300-$2,400 per month for 20 years 0% loan). If I purchase the apartment building using owner financing, I am curious if a bank will allow me to take out a line of credit or mortgage against $350k of equity and use it as:

a) funds for renovation AND (~$50k)

b) down payment (~$300k) for another ~$1.2M apartment building

In this scenario, I would then have a note with the owner of the 6 unit apartment building, a line of credit against that same property, and a loan against a new property. Will banks allow this type of lending? Will they ask about any private notes against the property? Do I have to disclose the owner financing? Will this owner financing come up during title search? Can I have the owner financing be a unsecured note? Will this note ever show up on my credit report?

Thank you in advance for the help!

Best,

Alex Jackman

My understanding is that the timing of when the legal title to the property changes hands can be negotiated. So, from what I have read sometimes the current owner keeps the title and sometimes the buyer receives the title. If I were to obtain legal title of the property, with a promissory note to the seller. Could I technically have the promissory note and obtain a equity line of credit? (Also, all my other questions related to credit)

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I have always wondered this. Very few banks will do HELOCs on investment property (although I know of ones), to take a 2nd lien position on a seller carry play...I would be pleasantly surprised if a bank did that. I'm sure someone out there will do it if you pay them enough interest but that's probably a private lender. 

@Peter T. I didn't think about the inability to obtain a HELOC on an investment property. I'm sure I could find a lender able to underwrite a LOC secured by the property. I don't think I would be able to use private money for the LOC though. I would need 25/30 year amortization with 7-10 year term for the LOC or mortgage on the 6 unit. I feel like a private lender wouldn't be able to provide these terms and or will rake me over the coals with points and/or the interest rate. Maybe someone else can jump in and provide some guidance from their experience. If not, I'll just try to tackle this 6 unit and then shop around with some lenders.

Assuming it is straight “seller financing” where You get the title.....the seller will hold a promissory note And a mortgage/deed of trust just like any bank would, so....you do Not have any equity and bank won’t lend to you because of it.

I’m guessing this “no interest loan” is your idea you read about somewhere....,don’t expect that to happen.

Account Closed Thank you for the replies. Both of these responses help. As for the 0% loan. The 0% loan is to protect the seller. He did not like my "low ball" offer, so I am offering seller financing. We inflated the selling price so he is ensured to receive at least $550,000-$575,000.

Example: Let's say I offer seller financed $450,000 30 year 4% loan, but the seller doesn't want to sell his property for $450,000 because 1 day after closing I can pay off the note and walk away with a $450,000 +1 day of interest apartment building. Instead we inflate the price to a $575,00 loan financed at 0% over 20 years. Now, I would have to pay $575,000 tomorrow to walk away with the building. Additionally, the seller will receive $2,400 per month for 20 years instead of $2,050 per month for 30 years. 

Not saying this will happen, but I will keep you all updated on the outcome! A 0% loan just provides different incentives/protections for him and I.

Hey @Alex Jackman a slightly inflated price for 0% interest does not protect you or him on anything. The price is the price. While 0% for 20 years would be super duper fantastic for you, does absolutely NOTHING for the seller except causes him to lose out on hundreds of thousands of dollars in interest.

I have gotten some owner financing at 0% interest for 6 months and up to a year. Not too big of a deal, but REALLY 20 years?!?! I might even try to get 5 years and then balloon the note after that. In 5 years you should have the property up and running and be ready to refinance it within that time period.

If you really intend to make it in this business you need to deal with people honestly and treat people right. Find out what is important to him and try to give it to him while at the same time make sure there is some profit in it for you also. If it does not work for you, walk away. Dont try to make him get into a deal by deception.

It sounds like you are trying to scam the bank to put a lien on a property that already has owner financing on it(deception). You should file the owner financing deed of trust with the county. YES the bank will pick it up and NO you can not get financing of double the value of the property.

@Rick Pozos  Respectively, I think you completely misunderstood my use of a 0% interest loan with the seller. If you understand how zero interest bonds actually work in the bond market, you may be one step closer to understanding this situation. Let me clarify and prevent further confusion for you. 

Let's say I get a $100,000 loan for 30 years @ 5% interest. At the end of 20 years, I personally elect to pay off the entire loan? What yield did the loaner get? He lent $100,000 and received 239 payments of $536.82 and then one final payment of $50,936.85 (the remaining principal). This provides an annualized rate of return of 5.11% 

Now, let's say I want to offer an identical yielding note, but with a 0% 20 year note. How much would I need to "pay" for that identical yielding asset. Well, we inflate the value of the loan to $158,210. The owner still gives me a $100,000 asset, but I owe him $158,210 over 20 years, so I make payments of $659.21 every month for 240 months. What yield does this transaction bring the loaner? You guessed it 5.11%

NOW, which asset is better for the loaner? Answer: the 0% 20 year note

If I decide to refinance tomorrow and pay off the 0% loaner I need to pay him $158,210, but if I were to have the 5% 30 year loan I would owe the loaner only $100,000.

So I would argue, yes, the 0% note is in the best interest of the home owner. He owns a large portfolio and wants to stop managing all his properties. I offered him $450,000, but he was hesitant about the price. Therefore, I am offering a 0% seller finance for the length of his retirement. He will be paid out the $450,000 plus interest (it's just the interest is baked into the principal). If he wants more than $450,000 then I will offer him $450,000 plus 5% interest over the next 20 years, but with the 0% route I guarantee him at LEAST at 5.11% yield on the note. If I repay early, his yield goes ways up and HE benefits. 

I work in treasury. I deal with the capital markets everyday and understand financing and yield at an advanced level. Furthermore, I pride myself on being an extremely ethical and genuine human being. I must say I took tremendous offense when you painted me as a scammer and deceiver. 

I thought this was an open community, where questions like this can be asked an answered.

To address the second lien. If a second lien position is what is needed, then I will look for a lender who will do this. But my plan was to have an uncollateralize promissory note with the seller. Then I was not sure if I had to DISCLOSE this note to a bank. If your grandma gives you a $100,000 loan, do you have to disclose that when opening a credit card, personal line of credit, HELOC, mortgage. Maybe yes maybe no. Maybe you could answer that for me as well.

I am not scamming nor deceiving. I am trying to leverage my dollars as much as possible while rates are so low. 

****(May I just add, I recall a biggerpockets podcast where Brandon mentioned he used a 0% loan with a seller financed property. If I am recalling correctly, is Brandon also a scammer using your logic?)****

Lastly, If you would like me to provide you some references to books about debt markets, I would be happy to provide you with a list.

@Wayne Brooks

When you have a loan secured by a property, YES you need to disclose. Acutally it should be recorded with the county. In real estate the loan is secured by the property. If you default, the lender gets the property.

If grandma lends you some money, it does not matter to the credit card company because they are lending you based on your credit, not the value of a property that you own. AND grandma is not lending you money collateralized by a property. If grandma gives you a loan collateralized by a property, you sure as hell better protect your grandma with a lien on the property because that is why she is lending you the money.

There is a big difference between secured debt and unsecured debt, but you already know this, you work in treasury. You already know that real estate loans tend to be SECURED loans. Secured or collateralized by the property that you are buying.

You can do a deal however you want. I can tell you that a seller hears that there is no interest on the loan and they are probably not going to go for the deal even if they are getting the same amount of interest from the deal. Keep things simple. Most people do NOT work in treasury and do not have a bunch of degrees like you so they tend to be a little more simple. Like me. I only have 1 finance degree.

When sellers do not understand or are not comfortable with the buyer, they tend NOT to do the deal with you. This is not a very complicated business, dont try to make it that way or you will not get deals done. Keep it simple for the simple people. It is called the KISS principle.

Having financed real estate deals in almost every state I can tell you everything these people said is

spot on. The more you try to reinvent the wheel the greater the chance of failure.