Creatively use Seller Financing, Hard Money Loan, and Bank Loan

5 Replies

Happy Friday BP,

I've gotten some great ideas by reading through a bunch of creative/seller financing strategies in the forums, but I am wondering if anyone has specific suggestions or ideas for my situation below.

Here's the scenario - a lot of moving parts so sorry for the long post - I have attached the seller's financial statement if anyone wants to go all in:

The seller is 72/retiring and wants to unload all of his properties. He has several SFRs that I am not interested in based on location, but he also has an 8-unit complex and owns 7 out of 10 condos under one HOA. For now, only the 8-unit complex is on the market which it has been for over a year since it is priced too high. When I visited the property and asked why he wanted to sell, he mentioned retiring and wanting to get rid of all of his properties. I told him I may be interested in the condos, so his agent gave me the potential income with the actual 2015 expenses from the tax return. Obviously priced too high when factoring in vacancy, PM, etc., but I am looking for a creative way to structure the deal to acquire all of the units.

The 7 condos consist of 5 duplexes built in 2006. Of the 3 remaining units he does not own, 2 are owned by another investor, one by an individual. They have both been contacted and are willing to sell the 3 units. The 10 units are under one HOA that the seller manages and has majority control over.

Side note: Upon obtaining all 10 units, I could dissolve the HOA to "save" an extra 580/unit/yr. Anyone familiar with this or is there a point because it is essentially a forced savings account with my money? Would it may make the properties easier to sell down the road if I keep the HOA? There are a little over $10,000 in reserves currently.

There are places to add value, increase income, and cut expenses (i.e. 8-unit is separately metered for electric) - some deferred maintenance and normal wear and tear, but no major renovations are needed to significantly improve the ARV (which I estimate would be somewhere between 1.65mm - 1.8mm).

The seller is willing to take on some (he did not specify how much) seller financing with a 2nd deed of trust as long as my down payment covers his closing costs.


I have a hard money lender that will lend at 8.5% + 1 point, which could possibly be used for the down payment.

So my question:

How can I creatively use the seller financing, hard money, and a bank loan to acquire all 18 units with as little as possible out of my pocket? I would love to hear any techniques I may be missing including what to offer for the whole deal.

Possible scenario? Use the hard money loan for a 25% down payment. Get a commercial loan for the remaining of the 15 units. Use what the seller would have been willing to finance to purchase the other 3 units outright. Then refinance all properties in a year to get rid of the seller financing and HML.

I would think by offering to buy the other 3 units quickly using the seller financing, saving the other 2 owners the trouble/time/money of getting a real estate agent and putting it on the market, they should be willing to work with me on the price.

Thank you in advance for any and all suggestions/advice!

@Wes Kirtz  Happy Friday!  The commercial lender and the hard money lender will each require a 1st lien position, so combining the two won't work unfortunately.

- Tom 

@Tom S. I'm sure it depends, but how would having the owner in second lien position work on just a residential single family property. Would the hard money lenders generally allow the seller to be added in the lien, allowing the owner to carry back some of the financing? How safe is it to be in second lien position from the sellers perspective. I need to make sure I can confidently say you will get pad no matter what. Cheers

@Tim Ivory Hi Tim - I've successfully used seller financing as a second lien and the HML first lien a number of times. That said, it depends a lot on the lender, the deal and your personal financials. It's always been a case by case basis.

For me, the first lien lender wanted to make sure I had sufficient cash reserves to complete the rehab project.  In fact, many times it was required I had the downpayment funds in advance, close on the deal, then execute a seller financed 2nd mortgage which effectively reimbursed me the down payment funds.  

@Tom S. Thanks Tom!

Hi Tim - I've successfully used seller financing as a second lien and the HML first lien a number of times. That said, it depends a lot on the lender, the deal and your personal financials. It's always been a case by case basis.

Sounds good. May I ask the role my personal financials would play in such a scenario, ie, what role would my income and cash reserves take in their decision process to allow the seller in second lien? Am I asking them to take on more risk by having someone else hold a lien position? At the end of the day, with partial seller carryback, I'll likely only need a hard money loan to finance around 40 percent of the purchase price, and pay off the seller after the property sells. As such, there should be more than enough equity in the property to recoup there investment.

For me, the first lien lender wanted to make sure I had sufficient cash reserves to complete the rehab project. In fact, many times it was required I had the downpayment funds in advance, close on the deal, then execute a seller financed 2nd mortgage which effectively reimbursed me the down payment funds. 

May I ask if the cash reserves were for paying the hard money loan payments and not in fact held in reserve for the renovations themselves? Right now, I'm calculating 4 months of reserves of interest only payments. I hope that is enough.

About the downpayment funds, I assume I would have to pay the downpayment to close on the hard money upfront. For instance, if I wanted a 75K loan, I would need to show up on there doorstep with atleast 7.5K (10%) of the purchase price before they would lend the money. Are you saying some would allow me to pay the downpayment afterward?? That would be nice.! 100 percent of the renovation value is covered in a lot of places, so I would not need to make a deposit here, however, it is unclear to me if the majority of hard money lenders cap the maximum loan to value for BOTH the downpayment + the repairs to 75% maximum loan to value.

Apologies for the long reply. Thanks again.

@Tim Ivory   Hi Tim - no problem on the long reply.

For the first question, I don't know the loan approval decision process by the lender unfortunately. They told me two things: they wanted to make sure I had cash reserves to finish the rehab in case it went over budget. They said the last thing they want is to take back an unfinished house, which of course wouldn't be worth the expected value (ARV). The second thing they mentioned was they still looked fairly heavily at credit, that I'm currently paying everything on time, nothing was late in the past year, and there were no judgments against me.

To the second question, about the down payment, you're right in that you typically need the funds and close first, and also expect the 20-25% range, I've never seen 10% down. Then after you close, and with the first lenders approval, you then execute the 2nd mortgage, ideally for 20%, so you're reimbursed the down payment funds and hopefully very little out of pocket. Of course, you have to factor in those 2nd mortgage payments. The last one I did was $25k at 7% simple interest, or $146 / mo. Then the $25k due back at the end of the term. The deal was $105k 1st mortgage, $25k 2nd mortgage, and the ARV was $180k. So the deal is very important too.

Good luck!

- Tom

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