Seller Carry Back Note...Good Idea?

Question

Hey everyone,

I'd appreciate any help or advice on this. I'm pursuing my first real estate investment, analyzed the deal and working on financing now. I'm leaning toward putting an offer in that includes a seller carry back note. If the seller accepts, it would look like:

80% mortgage, 15% carry back and 5% down payment.

It allows me to purchase the property with not much down and I would then use the cash flow to pay the seller the carry back note as a second mortgage essentially until it's paid off.

Has anyone used this in real estate investing before? If so, thoughts on it if you think it's a good or bad idea? How did it work out for you? I know it's not guarantee that the seller would accept, but the property has been on the market for a while so I believe there's a chance depending on how motivated they are. Any help would be appreciated, thanks!

Luke G. · Answer

@Ryan Alexander Yes, it can absolutely be done and I do it all the time, but you likely won't be getting a 30 year locked in rate.  These unique financing deals will only be looked at from portfolio lenders such as your local community banks that keep the loans in-house.  There will more than likely be a balloon payment due in 3-7 years, are you going to have enough equity to pay off the seller's note at this time?  What's your plan if the market takes a big step back and the bank calls the loan?

@Derek Harris is correct though, most banks are not fans of this set-up.  You will likely need to do some shopping to find a bank who would be interested in doing this.

How I generally use it is I have seller carry-back anywhere from 10-20% keeping my initial costs low (even 0 sometimes).  I then use my own cash or through a HELOC etc to improve the property and I do a pseudo-cash out refinance where I simply refinance and have the bank pay off the seller's note.  It's a modified version of the BRRRR.

You'd be surprised what some seller's will go for, I did a 4 property deal last spring that had a total purchase price of 290k, seller held a note for 20%, I had zero cash in the deal and I RECEIVED 50k at closing to begin renovations.  Seller is carrying a 10 year note, interest only at 3.5%, a great deal for both of us as it kept my cash out very low and he got rid of his small multi's.  If you don't have a high W2 and high net worth it gets extremely difficult to get a yes on a deal like this.

Derek Harris · Answer

Ryan, I usually present multiple options which can include: a cash offer (at a substantially lower amount), a bank financing offer which is slightly higher, and the seller financing option (which is usually the highest amount out of the three). I present these options on a letter of intent and whichever option they choose goes onto the contract. If you believe this deal to be a great one, I would consider partnering with someone. Also, ensure you have enough reserves. I would link up with the bank to see what their reserve requirements are.

Ryan Alexander · Answer

@Derek Harris

Hey Derek, thanks for responding. It is on the MLS, it’s already being rented and cash flow is estimated to be roughly $350 a month total for three units. What’s SFR you’re referring to? This is through a mortgage company and looks like they’re in for it but I wanted to reach out to see what someone else thought if it’s a good idea. If the seller denies it, so be it. I’m fine with it, just don’t have the 20% to put down on it for a conventional loan.

Derek Harris · Answer

Ryan, banks are not fans of this setup. You have very little skin in the game. I would verify the DP percentage. It is different for a SFR as it is for a 2-4 unit property. If you can determine the seller's motivation that will greatly help in the negotiation process. Is the property listed on the MLS? How much do you expect it to cash flow per month (after all expenses are taken into account)?