My name is Steve P. and I am have a question regarding creative financing. I just looked at a portfolio of 40 single-family homes in Buffalo. N.Y. that are rehabbed and rented out to Section 8 tenants. I can pick up the portfolio for $1,500,00 at an 18.5% CAP rate. I have an idea of getting the 100% financing and I'm just not sure how to go about it step-by-step.
I told my mortgage lender that I am picking up the portfolio for $2,200,00 and he said he can get me 75% which come out to $1,650,00 (which will include my closing costs). $1,650,000 (@ 6% 5 year ARM/30 Amortization)Now here is my problem. How do I complete the transaction now that I have the lender on board to give me the whole amount plus closing costs. Can I approach the owner and ask to say he is selling at $2,200,00? Do I tell the bank the owner is holding a 2nd mortgage? How do I go about completing the transaction? Any and all help would be much appreciated.
You're walking into some dangerous territory. You're talking about falsifying the transaction in order to get the lender to give you more than they would if they knew the truth. What you're really talking about doing is conspiring with the seller to defraud the bank. You claim the price is $2.2 million with a seller carry for $550K. You get the first, then the seller forgives the second.
Now, if you're totally up front with the lender about what's going on, and they're ok with it, you're fine. If you hide any of the details of this, you're committing mortgage fraud.
The legitimate way to do this is to buy it for the price you agree, get the 75% loan from the lender and have the caller carry a true second loan for the other 25%. That's legit, though, many lenders will require some of YOUR cash into the deal.
Thank you for your reply. I hope my post did not come off as me wanting to do something illegal or something of the sort because that is not the case. I'm just trying to figure out the best way for me to come out of pocket with as little as possible. The reason I told my lender that is to see if I was actually buying at a lower cap rate if he was able to fund it and he said that he could. Bottom line is I'm not trying to do anything illegal I'm just trying to figure out a creative way to utilize the fact that I am able to get my lender to give me the entire amount. That's all. Can I crowd fund the 25% I'm missing?
Lenders base the "value" in the "loan to value" calculation based on the price you're paying or the appraised value, whichever is lower. If this lender says they will give you 75% of the value and the price you're paying is lower than an appraisal, then they mean 75% of the price you're paying. Period. The fact they would loan you more money on a more expensive property doesn't change the value on this one.
Yes, getting the down payment through equity partners, crowdfunded or otherwise, is a legitimate technique. I have two investments like that. But, you do have to give up equity. You're not going to get investors to fund 100% of the down payment and keep much of a slice for yourself. In the deals I'm into like this, the syndicator put in a chunk of their own money and get the same percentage share as everyone else. They do collect management fees and that's an expense that comes out before the share returns are calculated.
Also be very careful about valuations on SFRs. SFR properties are ALWAYS valued based on comps. They are NEVER valued by the income method. The exception I've heard of is hedge funds who are parking their cash SOMEWHERE and are willing to overpay. Sometimes sellers try to set a value based on cap rates for a deal like this. They're often looking for a sucker. Admittedly there is some convenience for doing a big bulk deal like this. But don't let that result in you paying more than the houses are really worth.
Thank you for your time and insight. I appreciate it. I really do. These homes are based on the actual income. They are in the $40,000 range up in Buffalo, N.Y. and that's what SFR going for up there. Again, any and all info is much appreciated. :)
I know these properties. Always a good idea to check first.
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