How to properly sturcture money at closing deal?

Question

I have 2 commercial deals that interest me where I can purchase under value, get cash at closing and debt service the properties with profitable businesses. 
1) Plan to buy and hold. 
2) Owners are anxious and one has a lispendance filled so they're extremly ready to deal. 
3) I am working with limited funds so seeking creative financing, will consider a joint venture and I have great credit(745 Fico). I would like help on presenting my deals to a lender in a manner they would want to approve the loan, issue a Proof Of Funds Letter so I can make ligitimate offers.

1st deal is a free standing town house recently converted into a resturant night club with excellent mechanicals, havoc, commercial kitchen and liquor license already in place. Located in Manhattan N.Y. in an area where townhomes are selling for $1.5MM-$2.8MM. This one is offered only at $1.15MM.(This property has a lispendence filled).

2nd deal is a much smaller price of $160K and is a 6000 sqft. warehouse with a lot to be used as a car dealership. This owner is ready to deal and would owner finance or would be prime for cash at closing of which to be used to go toward helping finance and jump start the business. Also located in N.Y.

Do lenders want to hear all of this? Or are they just expecting you to pay the mortgage 30 days after your closing?

How do I present the offer and structure the contract to legitly recieve $20-$40K at closing? :D

Jon Holdman · Answer

Who would you be receiving the cash at closing from?  Any normal lender is going to want to see 30% plus down on deals like these.

If  you're going to get partners, you're going to have to get those first. One strategy is to form an LLC, get investors, and then have the LLC get the loan.  With enough cash in, and something of a track record, you might find a lender who will lend the LLC the money.  You use some of the investor money as the down payment, some for the closing costs and due diligence, and keep some of it for working capital.  It WON'T put cash in your pocket, if that's what you're looking for.

Setting up an LLC like this and finding investors is a big job.  Figure $20-30K in legal fees.  That will still give you only the ability to solicit people you know, not the public at large.  Public offerings of securities (i.e., getting investors) is a multi-million dollar project.

The second deal may be your better bet.  If the owner is willing to finance, including giving you some cash when you close, there's your deal.

On that first one, no lender is going to let you buy for $1.15MM and give you a $1.2MM loan that covers your costs and lets you walk away with $20K.  Realistically, the most you're going to borrow on a deal like that is something like $750K.  The $1.5MM to $2.8MM value is irrelevant, except that its higher than what you're paying.

Now, if that was some sort of fix and flip or buy and hold, you might find a hard money lender to finance the deal.  Really, you're talking about a mezzanine lender at that kind of price tag.  That's a tough fix and flip, since you're into jumbo territory, and have a big mess to fix to get rid of that restaurant junk.  If you want to keep it as a restaurant, you're talking commercial and the residential comps are irrelevant.

Even if you find a lender who would do a second, a first position lender is not going to allow a CLTV (combined LTV) much above 90%.  And then you're looking at premium rates on the loans.  Even if the seller on that car lot is willing to kick in, say, $60K, a bank is not going to lend you $130K and let you walk away with $20K (after costs) of their money.  They're going to want to see some of your own money in the deal.  Your best bet for getting cash on either of these deals is to 1) get them under contract and flip the contract to someone else, or 2) get the car lot seller to give you $20K in cash and the property in exchange for a $190K note.

Tracy Brown · Answer

On that first one, no lender is going to let you buy for $1.15MM and give you a $1.2MM loan that covers your costs and lets you walk away with $20K

This area is questionable, it may depend on how your contract is structured. I have a collegue who puts a buy back clause in his contracts where as the seller puts up a non-refundable deposit(which turns into the buyer's cash) on the buy back option of the contract.

Would a lender frown on this or is this possible in today's market? Or is this something that would fly?

Your best bet for getting cash on either of these deals is to 1) get them under contract and flip the contract to someone else

How can I get a legit Proof of funds letter to acheive this with limited funds?

Do I already need the end buyer first?