Creative ideas needed for financing down payment of an Owner financed deal

Creative Real Estate Financing
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Creative ideas needed for financing down payment of an Owner financed deal

Desiree Sprague
Member since 2019 · 12 posts · 3 votes

Hi am a new investor. I purchased my first mobile home in Ohio two years ago and it is going on the rental market in February of next year due to a family member living in it at the moment.  I am also a travel healthcare nurse and currently under contract in Hilton head Island South Carolina.  I am very interested in getting into the short term rental properties here on the island. I am looking at making my first deal on a short term rental property using owner financing.  The asking price for the condo is 349,900. The owner is asking for 20% down to finance and set it up like a 30 year mortgage balloon type payment. At the end of 2 - 3 years The rest would be due in full (hopefully rates will be down in 2 to 3 years).  This would still leave me coming up with 70K for a down payment, which I do not have, so I am looking for a creative loan option for that down payment. Any other suggestions / ideas also would be greatly appreciated.
Thank you in advance.

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Christian EhlersBusiness Member
Real Estate Agent · NH & MA · Member since 2021 · 457 posts · 291 votes
2y

I think @Steve Vaughan had some excellent points here. A 2-3 Year balloon is incredibly short if you don't have a solid plan to refinance out in that time period. I've seen this done but usually only when there is a major rehab project as you'd be increasing the property's value substantially. 

I wouldn't do that short of a balloon, 5-7yrs is the minimum for many investors incase the market takes a downturn which you can't control.

For the downpayment you could try a few things like private money lenders if the deal has enough income to support it, or you could seller finance part of the downpayment. You give them some down payment upfront and then negotiate 6 months for example of 0% interest payments or no payments at all, which you can then use however you need (down payment, reserves, etc). 

[email protected]978-396-9939
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  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    2y

    Does the HOA allow STR? Will HOA write a letter saying you can do STR for the next three years? How solid is the HOA in reserves? Will HOA have a special assessment next year?

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Desiree Sprague

    With the current markets and economic conditions, I would not recommend over leveraging - therefore even if I could get 100% financing I would not want it unless I have significant cash reserves

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  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Caroline Gerardo:

    Does the HOA allow STR? Will HOA write a letter saying you can do STR for the next three years? How solid is the HOA in reserves? Will HOA have a special assessment next year?

    thank you for the response. 
    Yes the HOA will allow STR “the resort is set up for Individually owned & operated STR” is exactly what the resort manager told me when I did a quick walk thru. 
    How solid is the reserves? I’m assuming u mean if they keep up with the facilities?  I did a walk thru of the  resort and it was very well Maintained. I also did a Google review of the resort and most of the negative comments were about the individual condo not the resort itself. No special assessment that I am aware of for next year just the monthly dues but I will double check that on Sunday when I go back for another walk thru. 

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  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Chris Seveney:

    @Desiree Sprague

    With the current markets and economic conditions, I would not recommend over leveraging - therefore even if I could get 100% financing I would not want it unless I have significant cash reserves

    Ok thank you for you reply. 
    I appreciate the insight. 
    0Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    2y

    Many HOA's are in trouble because insurance costs tripled. The HOA budget needs enough cash to pay all their bills and look solid so you can get financing. If the complex is less than 51% owner occupied financing is limited. If it's not you won't be able to refinance to low rate in three years.

    Get the STR in writing.

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  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Caroline Gerardo:

    Many HOA's are in trouble because insurance costs tripled. The HOA budget needs enough cash to pay all their bills and look solid so you can get financing. If the complex is less than 51% owner occupied financing is limited. If it's not you won't be able to refinance to low rate in three years.

    Get the STR in writing.

    Gotcha!!  thank you!  that is very vital information to know!! I really appreciate that! 
    0Reply
  • Brittany MinocchiBusiness Member
    Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes
    2y

    What's the benefit of seller financing here? Why not get a 30 year fixed loan meant for rentals instead of boxing yourself into a balloon in 2-3 years? That still doesn't solve your down payment issue though…could you form an LLC with a silent partner that would contribute the down payment? The perk of using other peoples money is not typing up your own….but if you don't have reserves (meaning funds in the bank or other liquid assets) as a backup plan as others have mentioned, 100% financing is risky.

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  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Brittany Minocchi:

    What's the benefit of seller financing here? Why not we get a 30 year fixed loan meant for rentals instead of boxing yourself into a balloon in 2-3 years? That still doesn't solve your down payment issue though…could you form an LLC with a silent partner that would contribute the down payment? The perk of using other peoples money is not typing up your own….but if you don't have reserves (meaning funds in the bank or other liquid assets) as a backup plan as others have mentioned, 100% financing is risky.


     Benefit of owner financing is cheaper interest rate. 

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    2y
    Quote from @Desiree Sprague:

    I am looking at making my first deal on a short term rental property using owner financing.  The asking price for the condo is 349,900. The owner is asking for 20% down to finance and...balloon type payment. At the end of 2 - 3 years 

    Our biggest risks are the things we can't control.  2-3 yrs isnt long enough, especially with 20% down.  We have no idea where values or rates will be. 

    STR in an HOA is another risk. They could disallow anytime, have a special assessment, not be managed well, etc.

    My shortest balloon was a 5yr on a seller-carried 7 unit.  We were at the buzzer getting long-term commercial financing as it was 2012 and lending just started picking up again.  

    Who knows if lenders will have an appetite to fund STR condos within 2-3 years. Get 5-7 or pass.

    2Reply
  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y

    Thank you everyone . I appreciate the advice 

    0Reply
  • Cliff BennerBusiness Member
    Accountant · Denver, CO · Member since 2020 · 394 posts · 183 votes
    2y

    Why do they want a balloon payment in such short time? Could you increase interest rates and maybe do a year of Interest Only to incentivize them to extend the balloon payment and do no Prepayment penalty so you can refinance it when interest rates lower? 

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  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Cliff Benner:

    Why do they want a balloon payment in such short time? Could you increase interest rates and maybe do a year of Interest Only to incentivize them to extend the balloon payment and do no Prepayment penalty so you can refinance it when interest rates lower? 


     I think he wants out of it all together. He is moving back home and doesn't planning on coming back to SC. He wanted to do a balloon payment in a year, max two but I refused that right up front. I think I'm going to pass on this whole deal. 

    Thanks for the advice I appreciate it.

    0Reply
  • Cliff BennerBusiness Member
    Accountant · Denver, CO · Member since 2020 · 394 posts · 183 votes
    2y
    Quote from @Desiree Sprague:
    Quote from @Cliff Benner:

    Why do they want a balloon payment in such short time? Could you increase interest rates and maybe do a year of Interest Only to incentivize them to extend the balloon payment and do no Prepayment penalty so you can refinance it when interest rates lower? 


     I think he wants out of it all together. He is moving back home and doesn't planning on coming back to SC. He wanted to do a balloon payment in a year, max two but I refused that right up front. I think I'm going to pass on this whole deal. 

    Thanks for the advice I appreciate it.


     Almost sounds like the perfect seller for a Seller finance deal. He can get steady check per month and have no headache from the property.

    Could you offer do a Hard Money Lender or some quick financing for him and give him a 70% of ARV offer with it so you could put little down and then refinance into a long term loan? Obviously a Lender would be able to help you on that part more then I know.

    Then he gets rid of it and you get a discount, but you dont get that Seller Financing you are looking for. 

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  • Samuel DioufBusiness Member
    Real Estate Agent · Columbus & Cleveland, OH · Member since 2023 · 1k+ posts · 1k+ votes
    2y

    I would recommend going to RE meetings and networking with fellow investors maybe someone would want to partner with you if the deal is good enough and you are willing to do the groundwork.

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  • Christian EhlersBusiness Member
    Real Estate Agent · NH & MA · Member since 2021 · 457 posts · 291 votes
    2y

    I think @Steve Vaughan had some excellent points here. A 2-3 Year balloon is incredibly short if you don't have a solid plan to refinance out in that time period. I've seen this done but usually only when there is a major rehab project as you'd be increasing the property's value substantially. 

    I wouldn't do that short of a balloon, 5-7yrs is the minimum for many investors incase the market takes a downturn which you can't control.

    For the downpayment you could try a few things like private money lenders if the deal has enough income to support it, or you could seller finance part of the downpayment. You give them some down payment upfront and then negotiate 6 months for example of 0% interest payments or no payments at all, which you can then use however you need (down payment, reserves, etc). 

    [email protected]978-396-9939
    2Reply
  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Cliff Benner: that’s a great strategy. Thank you! 
    Quote from @Desiree Sprague:
    Quote from @Cliff Benner:

    Why do they want a balloon payment in such short time? Could you increase interest rates and maybe do a year of Interest Only to incentivize them to extend the balloon payment and do no Prepayment penalty so you can refinance it when interest rates lower? 


     I think he wants out of it all together. He is moving back home and doesn't planning on coming back to SC. He wanted to do a balloon payment in a year, max two but I refused that right up front. I think I'm going to pass on this whole deal. 

    Thanks for the advice I appreciate it.


     Almost sounds like the perfect seller for a Seller finance deal. He can get steady check per month and have no headache from the property.

    Could you offer do a Hard Money Lender or some quick financing for him and give him a 70% of ARV offer with it so you could put little down and then refinance into a long term loan? Obviously a Lender would be able to help you on that part more then I know.

    Then he gets rid of it and you get a discount, but you dont get that Seller Financing you are looking for. 


    0Reply
  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Christian Ehlers: Great advice!! Thank you, I really appreciate it. 

    I think @Steve Vaughan had some excellent points here. A 2-3 Year balloon is incredibly short if you don't have a solid plan to refinance out in that time period. I've seen this done but usually only when there is a major rehab project as you'd be increasing the property's value substantially. 

    I wouldn't do that short of a balloon, 5-7yrs is the minimum for many investors incase the market takes a downturn which you can't control.

    For the downpayment you could try a few things like private money lenders if the deal has enough income to support it, or you could seller finance part of the downpayment. You give them some down payment upfront and then negotiate 6 months for example of 0% interest payments or no payments at all, which you can then use however you need (down payment, reserves, etc). 


    1Reply
  • Desiree Sprague
    OP
    Member since 2019 · 12 posts · 3 votes
    2y
    Quote from @Samuel Diouf:

    I would recommend going to RE meetings and networking with fellow investors maybe someone would want to partner with you if the deal is good enough and you are willing to do the groundwork.


     This is a great idea thank you

    0Reply
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