If an owner was willing to seller-finance more than 30% of the property's value, would a lender be willing to loan me the remainder of the deal?
Property worth : $320k
Seller-finance : $120k
Loan : $200k
The plan would be to bring the property up to par as tenants' leases expire so that I can increase the rents, refinance, and pay back the seller's portion of the deal. Does this happen in the real estate world?
very common the owner gives you a second loan behind the lenders first
Depends. Used to be common. But many lenders won't allow 2nd positions. If you shop around you might be able to find someone willing to do it.
If the bank lent me 70% LTV, which is more than enough to cover the seller's portion, could I then draft a note to pay back the seller but keep the note separate from the property? I'm assuming that most notes are collateralized against the property, I'd like to keep it separate but still make it legal so the seller receives his portion within the time he wanted.
Updated over 3 years ago
Please omit the portion where I state "more than enough to cover the sellers portion". The intent of drafting a note would be to cover term of the seller finance. The 70% LTV would be enough to cover the non-seller finance portion.
Just trying to keep thinking outside of the box but would crowdfunding work to come up with the remaining portion as well?
@Justin Young May work on the crowdfunding. Most crowdfunding sites don't allow real estate investing. It's mostly for debt consolidation, vacation, etc. I think the only issue you'll run into based off of my very little experience, is having your money shown as "seasoned" by your lender. If that is what you were asking in regards to using the whole amount (your cash plus the crowdfunding money) for a downpayment. If it is, most lenders don't like to see money pop up and typically check the last two months statements.
@Alex D. I was thinking of crowdfunding the remaining portion that the seller wouldn't finance, then let it season per the lender's requirements so that I can refinance out of the deal to pay back the crowdfunding.
Our commercial portfolio normally looks to have no more than 80% LTV for their part. The remaining 20% that we need to come up with can be 10% our funds and 10% seller finance or private funds. Either of those would obviously be in the second position.
Our lender has said that they would let our portion be lower if the seller was willing to do a larger portion of seller financing. He qualified that with "the lower your (meaning me) skin in the game that you want to put in the stronger your numbers will need to be to make sure it is a very solid deal."
An example might be 60% bank, 5% me and 35% seller finance. One seller I was talking too was willing to carry 70% and we could have done 25% through the bank and 5% us - in that case his selling price was just a bit too high to make the numbers work. His goal was to get enough to pay his capital gains taxes from the bank and then make a nice return on the remaining equity instead of putting his funds in CDs (he was retirement age and then some)
@Justin Young In general this won't be allowed to use seller financing as part or all of the downpayment for conventional financing. As Dan mentioned in the post above, it's possible with commercial financing.
IMO, be careful with your above comment to use a combination of sources to fund, and then refinance. If you're borrowing about 100% to finance, you have almost no equity. A typically refinance for investment property is 75% LTV, so a refinance isn't going to get you any money. In fact, you have to bring money to the table to refinance.
Hope that helps,
@Tom S. Lets say the seller is willing to carry back about 37.5% of the value. Then I find an underwriter to loan me 70% LTV, giving me a 7.5% spread between the initial non-seller financed portion and new loan. I would still have some reserves for what ifs and I wouldn't be 100% financed right? I would just have two separate entities that I'm making monthly payments to (seller and lender). Please correct me if I'm totally off.
@Justin Young That's correct that you have two separate loans and two separate payments. But you are 100% financed, so the risk is that if you have to sell immediately for some reason, you would have to bring cash to the table to sell (because of closing costs). To throw some numbers on it:
1st position lender (bank) = $70k
2nd position lender (seller) = $37.5k
You walk with say $4k, after $3.5k in closing costs.
Sell = $100k less 6% commission, less $3k closing costs = $91k net. $91k proceeds + 4k cash less 107.5k loans = $12.5k cash needed to sell.
To refinance , it's worse because they'll probably lend you $75k on that $100k house, but you owe $107.5k.
For the above reasons, the bank (lender 1) probably won't allow this, unless you have substantial cash or assets.
As others mentioned, a 10% down from you, 10% from the seller and 80% from the bank is much more likely.
@Tom S. What if its a small apartment and between tenant turnover I'm able to rehab the units to increase the rent to match the market, the refinance would be based off the increased NOI and market cap rate?
@Justin Young You'd have to speak to your lender on what they would use. I own a 5 unit and even for that, they weight the comparable sales approach more than income approach. But that might just be my lender and/or the market here.