can you use banks money for down payment on owner financing?

Question

i am looking at a 36 unit property that’s worth about 1.4 million. that’s what the owner is asking he is willing to do owner financing. i was wondering if i went to the bank and ask for $280,000 loan? then used that money to buy the property and pay the guy on the side for the rest that is owed? i can’t get pre-approved for that much plus i can’t come up with the full $280,000 to do a normal bank loan. i can get about half that. my thoughts was the seller would get 20% down. i would pay the bank there 20% down so i would be getting the property for $56,000 ruffly out of pocket with cash to help float with. can this be done? if not why not? my thoughts was i was just going to tell the bank this is what im buying the property for? do they need/have to know the owner financing side of the story?

David M. · Answer

@Chambers D McClay

I'm not entirely sure I'm following...  To apply for the loan, the lender will need to see the purchase contract, otherwise how else will they know the LTV?  They will want to know where the rest of funds are coming from.  There is no point in them lending you money if you can't close the deal.  Meanwhile, one of the two lenders will get screwed if your plan could somehow work.  Only one of the lenders will have the 1st position lien.  They both will be lending to you, in your plan, expecting to be 1st position lien.  That will come out in or before closing.

You don't really "pay the bank their 20% down.."  The "down payment" isn't really a "payment."  Its a misnomer.  Listen to any car commercial, for example.  They never day "down payment."  Its just so much "down."  Look at any HUD-1 / settlement statement.  There is no line item for the money down.  That's just part of what you have to bring to the table.  For example, if you purchase a property for 100 with 80% ltv, the lender comes to the table with 80.  You have to bring 20 (plusing closing fees/costs, of course).  You didn't "pay" the bank anything.  You paid the seller the balance of the purchase price as agreed.

I hoe this make some sense.  Good luck.

David M. · Answer

@Chambers D McClay

Wow, that would be a pretty trusting seller...  Without a lien and promissary Note after the property is deeded to you seller has no legal recourse if you don't pay...

Out of curiosity, how can you not get the full loan?  Why do you think you could refi later?  This has to be a commercial loan at 36 units.  So, what would have changed?

Tom S. · Answer

@Chambers D McClay  If the seller still owes $350k on the property, he can't owner finance it to you.  Yes, the current lender will already have a "due of sale clause" so if the seller tries to transfer title to you, the lender will know and will call the loan.

The cleanest way to do it is come up with $350k down (which will pay off the existing lien), and then have the seller finance the rest.  That way you get clear title and make the payments to seller.  The seller may not care much how you come up with the $350k, so it you can do a partner, friend/family/personal loan combination, that may work.

Ultimately, as noted above, you'll eventually have to refinance and qualify for a commercial loan.  Most sellers won't or cannot hold the loan for 30 years, and commonly it will be 5 or 7 years, and then you'll have to refinance.

Chambers D McClay · Answer

i guess on this property he owes about $350,000 on it can you do "due on sale" for commercial property?

Chris Seveney · Answer

@Chambers D McClay

Most likely the banks answer in either situation is no. First the bank will absolutely want to be in 1st position.

They will ask where rest of funds come from. If you get 20% from them and the seller Carrie’s a 2nd for 80% that is a trusting seller

The other way to look at this is to get 80% from a bank and 20% from seller - but again bank typically does not allow a 2nd loan

Chambers D McClay · Answer

Yea there would be some binding piece of document that ties me back to the property and the agreement. I didn’t mean that we wouldn’t have something more legal in place but wondering why or if a bank would buy off on that.What’s stopping him from taking the second position on the property?

I don’t have enough to put down and if I did that would leave me hurting on free cash Incase something came up. I was approved for $530,000

Yea it is a commercial unit and it apprised deformed 1.3 once’s about a year ago so the Property is based of the income. And he’s raised rents since then so it should apprise close to the same if not more. Based off of how commercial properties work.

Chambers D McClay · Answer

i figured if the seller would agree to the on paper $260,000 price the bank for take 1st postion. then i can pay him on the side.yes the seller would be taking alot of risk but the bank would appraise it for around the 1.4 because it was appriased for 1.2 since then the seller raised rent and few other value improvements. i could refi after so long and use that the pay the seller or the next deal i guess. i do not want to screw the seller at all because he has many more properies that i would like to be able to get over time.

i guess im trying to see if there is away to give him an ok size amount of money down. with as little out of pocket as i can get. so that why i thought if i would use the banks money .

can you use banks money for down payment on owner financing?

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