Seller willing to loan the 20% as second mortgage

10 Replies

I've taken BiggerPocket's podcast advise to offer value before asking for value... by volunteering to be the newsletter editor for my local Landlord club has instantly put me in the spot light.  Through this, I've met every active member of the club.  I've had two different landlords approach me regarding their desire to retire in the next couple of years from landlording.  They mentioned the idea of 'carrying paper' for the 20% down requirement of my bank.

So I would borrow 80% from my community bank and 20% from the seller.  I talked with my bank and they have loaned in situations like this before and are willing to work with us. 

So now my questions!  : )  What the pros and cons, recommendations, any articles or blogs I can read... what should I do?

How does this work as far as timing?  I need that 20% when I close from the seller to give to the bank, but I won't have title yet to secure the 2nd mortgage for the seller?  Does my question make sense?  How many questions can I ask?  lol

I'm not a complete newbie to landlording, I have 10 properties which is 14 rental units.  I'm just new to the idea of the seller financing 20%.  Looking for your thoughts, thanks!!

Doug Emerson

I suspect you would be purchasing with a promissory note and second mortgage with the Seller. This can be drawn up by the Title Company or an attorney.

This can be a great opportunity but you have to really crunch the numbers. With 100% financing your payments will be higher, as is your risk if the market turns. Make sure you're honest about the numbers so you don't dig into a hole you can't get out of.

The first lender will want to see some cash reserves, too. Six months PITI or some such.

The danger with 100% financing is that if values fall and you have to sell, you will have to bring cash to the table.  You need something like 10% appreciation just to escape from the property without having a loss.  Better to think of 100% financing as a deferred down payment rather than no down payment.

Based on my numbers by financing 100% (using a four plex that one of the landlords has as an example) it will cashflow around $670. My numbers include PITI, property management but not cap-ex or taxes.

This four plex example, he would sell at $150k but it appraised at last summer for $167k and each unit is currently rented at $575.  (based on my experience, his rents are low).  I was going to offer $140k.

It looks like adding $670 per month to my income with no money down.

@Nathan G

@Nathan G. The title company would handle the agreement between the seller and I?  You make it sound easy... I was assuming there would be clauses to include or exclude, things to look out for...  Thanks for your reply!

@Jon Holdman We're on the same page with a deferred down payment thinking... housing prices are finally increasing in my area as the job market is extremely strong.  Thanks for your reply too!

Originally posted by @Doug Emerson :

I've taken BiggerPocket's podcast advise to offer value before asking for value... by volunteering to be the newsletter editor for my local Landlord club has instantly put me in the spot light.  Through this, I've met every active member of the club.  I've had two different landlords approach me regarding their desire to retire in the next couple of years from landlording.  They mentioned the idea of 'carrying paper' for the 20% down requirement of my bank.

So I would borrow 80% from my community bank and 20% from the seller.  I talked with my bank and they have loaned in situations like this before and are willing to work with us. 

So now my questions!  : )  What the pros and cons, recommendations, any articles or blogs I can read... what should I do?

How does this work as far as timing?  I need that 20% when I close from the seller to give to the bank, but I won't have title yet to secure the 2nd mortgage for the seller?  Does my question make sense?  How many questions can I ask?  lol

I'm not a complete newbie to landlording, I have 10 properties which is 14 rental units.  I'm just new to the idea of the seller financing 20%.  Looking for your thoughts, thanks!!

Doug Emerson

Seller financing is a great way to go. Just don't over pay for the property. Escrow or a real estate attorney can draw up the proper paperwork.

Doug,

Personally I would stress-test it, with all costs factored in. Can you handle the debt if you have a higher than expected vacancy period? Are you able to hold the property indefinitely if the property loses 10% of its value overnight due to market forces?

@Doug Emerson You might see if you can negotiate a very low or even a no monthly payment on the 2nd  until a balloon payment is due? If go that route and if the seller is open to it, you will cash flow better. But, be prepared for the refinance with the balloon by negotiating the balloon as far out as possible. 

I would shoot for 5-7 years? Yes, your betting on appreciation, but your also getting mortgage pay down and better cash flow in that 5-7 years on the 1st mortgage. It just might make the whole thing easier to get done with a bit less risk involved?

@Kevin Romines With both of these investors, I'm at the very beginning of the process.  They are not seeking buyers actively, I think I just 'crossed their paths'... so that gives me time for throwing ideas out there like low payments or interest only payments.  But from the conversations I've had with them, they seem interested in a couple things.  Keeping some sort of cash flow as a way to stay in the game and not completely retire and to help a youngster (relatively younger) on their path.

Ultimately I need to get a good deal on the purchase so I can refinance (my community bank only requires 1 month seasoning) when I want to pay off the second mortgage.

And thanks @Nathan G. for the article link... I'm going to read it now