Creatvie financing on 3 duplex units

10 Replies

Hello all,

while buying property for a 1031 exchange, I found 3 duplexes owned by single owner. I have enough money from 1 of 3 duplexes, in the 1031 exch account. I am really wanting to get all 3, for a better price. 

Here is my plan

use remaining 1031 exch money for unit #1 ( need full price to satisfy the total 1031 exch minimum)

Get a 30% price cut on the other 2 units

Get hard money loan 18mo for 100% purchase of the 2 units. 

Make purchase

Get loan in 12mo. to pay off the hard money loan.

Is this possible? 

What type of security does typical hard money loaners require?

The plan for 30% price cut is to allow for refi to leave 25% equity for conventional bank.

I do have $50k in stock account I can use, but would rather not. Also $10k in savings bank cash. 

@Jim Butterfield doing what you described above might get tricky in a hurry.  Terms of your 1031 are that your property must be higher value and your loan must be a similar amount to the property you sold.  It seems that buying unit #1 fits but just keep the loan thing in mind too.  Also that improvements have to be made within that 6 month time frame to count them towards the amount or your "bumper" will be too low and you will be subject to the capital gains tax on the difference. 

Also, are the properties platted separately?  Meaning, are they all on the same lot or different lots?  That will affect your next loan.  Please do speak with your lender about the feasibility on properties such as this.  

Typically a hard money lender will only lend you 70% of the ARV if that helps. I would certainly take advantage of declaring 2 different properties (or the 200% rule) in your first 45 days incase it doesn't work out. I would strongly suggest speaking with your 1031 exchange about this too. It sounds like it could fit, but lots of moving parts here for sure.

@Andrew Postell sorry to confuse anyone... 3 separate duplexes. 1 will be purchased on its own to satisfy the 1031. the other 2 are still going to be separate purchases with the new financing. These are all 3 separate units with separate tax lot ID's. The package I speak of is I will be buying all 3 off the same owner. 

Yes I have 7 more days of my 45 day identification period left. We just closed on the first property of $170k towards the $300k needed to buy. 

@Jim Butterfield   Regarding the two duplexes that you'll be financing, two issues pop into my mind: why would anyone agree to discount them by 30%?  And in general, lenders won't lend 100% of the purchase.  

Or are these duplexes in really bad shape and you're bringing in your own rehab funds?

- Tom

Originally posted by @Jim Butterfield :

@Andrew Postell sorry to confuse anyone... 3 separate duplexes. 1 will be purchased on its own to satisfy the 1031. the other 2 are still going to be separate purchases with the new financing. These are all 3 separate units with separate tax lot ID's. The package I speak of is I will be buying all 3 off the same owner. 

Yes I have 7 more days of my 45 day identification period left. We just closed on the first property of $170k towards the $300k needed to buy. 

 Why not skip the hard money, and use the 1031 funds for down payments on all 3 at the same time? 

I'm not a 1031 exchange facilitator, but I know for a fact that you can 1031 a pair of SFRs (Bay Area price points) into a shopping mall (midwest price point), so I can't imagine this wouldn't be possible. 

@Andrew Postell Hello Andrew. Yes we have already purchased 1 unit from the 1031 moneys.. now looking at a 2nd. I don't quite have enough for 2 of them. Not to mention the third. Also I just noticed, that his purchase price has dropped $10k in the last 30 days. My initial sheet shows price of $160k and now the new sheet came through at $150k 

@Tom S. Hello Tom, this is my plan, never said it was going to happen. Just one plan I am working on. No they are not trashed, and i am hopping the seller wants to move them bad enough to make a deal. With 141 days on the market, he might be motivated. 

@Jim Butterfield I feel like you've got a good handle on what is expected and if you can make it work I'm all for it.  Sounds like the properties would fit traditional financing.  It sounds like it would fit but I will always defer to your 1031 administrator.

I've purchased multiple properties from the same seller before.  I financed the best one conventionally at the highest appraised price possible, then had them carry the others at a comparable discount using some of the loan money as DPs on the seller financed properties.  

But there is an agent involved, so gets a little more difficult.  Educate both and assure the agent they will get their commission.  Ask the seller to carry for at least 14 months to allow for seasoning + refi loan closing time

Originally posted by @Jim Butterfield :

@Steve Vaughan excellent idea... I will make that as an offer to them. Didn't even think about them carrying the note for little while... the units have been on the market for a few days already. 

 Yeah, it worked well for me. Say you guys settle on $878,647 for all 3 (just throwing a number out there). The nicest will appraise for $380k, then just make the other 2 split the diff.

The key is to give some money as a DP on every property. Even $1000. Consideration must be exchanged for each transaction.