Seller carrying part of the down

13 Replies

Anyone have experience with the seller carrying, say, 10% or so? I'd put 10% down while they carried another 10% Maybe you know where I can find more info on this? My main issue with this is curiosity of a typical bank response to this. Is this something a bank would run from? Thanks everyone!

@Alex Tobias  

If it's residential, the bank may not like it. But with a commercial loan, it's more common.

If it's a residential 1st mortgage, you could probably do a seller assist, it depends on what prepaids the mortgage company will allow them to assist you, it's usually 6% or less. And then you can maybe have the seller pay your side of the transfer tax to get it up a little. 

That depends on what type of property you're talking about @Alex Tobias . For commercial mortgages, I typically see lenders allowing a 75% LTV and allowing a second mortgage to be held by the seller, so long as you are personally putting up at least 10% and all of the numbers still work from a cash flow perspective.

If you're talking about a residential mortgage, nope.  Not gonna happen.  Seller seconds are a thing of the past.  

And as a reminder, in either case, if you do NOT disclose to your primary lender that you're having the seller finance a portion of your downpayment, that's considered mortgage fraud.  

I thought we are in a commercial part of the site, but I may be wrong. Yeah I meant for commercial. 

Thanks @Dave Van Horn

@Matt Lefebvre So it sounds like banks aren't extremely concerned? It makes sense that they wouldn't be. If there was a problem, they'd keep the down payment. The biggest issue sounds like convincing the seller to have faith in the buyer. Good reminder to disclose it to the bank. I wouldn't have even thought about not doing that lol. Also we may be surprised if Trump repeals parts of the SAFE act

@Alex Tobias Commercial lenders still are concerned.  In fact they're typically more concerned than their residential counterparts because houses by comparison are fairly easy to sell if it gets foreclosed on.  If a commercial property gets foreclosed on, that's a much more niche market and they have to maintain some existing tenants (depending on the lease agreements and type of property).  

The bank cares about their investment first and foremost. They want to make sure that the "quick sale price" of the property is never going to dip below the balance of the mortgage they carry. They also want to make sure the cashflow from the investment can support the debt service plus some extra cushion (that's where a DSCR comes in).

Because of the larger numbers, banks are typically willing to allow more creative financing terms, because they don't expect each and every customer to always have exactly the amount of cash needed.  

Convincing the seller to lend your a portion of the money is definitely a big undertaking too.  They have to evaluate whether or not you'll ever pay them back or if they get paid bank after the bank gets paid.  Usually the mortgage they hold is "second position" (hence the term "seller second") so the bank gets their money back first.  

Shop your local banks! I have had more luck using a carryback with local banks then HML. So many people neglect this part of their business. Just go looking for a commercial lender in your area and ask them. If they won't do it then keep looking. Build relationships with these lenders, they want to know who they are lending to.

@Matt Lefebvre

Banks creative huh? Good to know. The only problem is I'm mainly a mobile home park investor and I've heard mostly that banks are mostly repelled by us to begin with lol. I say, "I'm interested in a loan for a mobile home p" and they hang up the phone lol

All good points. The 2nd on the seller wouldn't really have the property as collateral? 

@Alex Tobias @Matt Lefebvre @Dave Van Horn @Adam Stacey great discussion guys.

Anyone ever negotiated with a seller to carry back an unsecured loan w/ a personal guarantee (instead of a secured second)? This would theoretically allow you to get higher leverage than the primary lender in 1st position would allow with a secured second. 

From a sellers perspective, is a second mortgage was a bit of a false sense of security? If the buyer goes underwater and gives the property back to the bank or files chapter 7, the second won't be left with much regardless after all is said and done with the foreclosure. Wouldn't the seller see an unsecured loan with a personal guarantee as a reasonable alternative, especially if priced more attractively? More realistic for smaller buildings probably, but something I've been noodling over. 

I have not negotiated for an unsecured carry back. That could work... if you can talk them into it. I have negotiated to trade the carry back on the property being purchased for a carry back secured by a second on another property I owned. the deal didn't go through but the negotiations went well. Good luck

@James E.   I believe the personal guarantee is built into the first or second mortgage anyway.  In other words, if you get foreclosed on by the 1st position lender, they just don't take the place and you're off the hook.  They can still sue you for the "deficiency", the amount still owed, not covered by the property value.  

@Tom S. For commercial loans on 5+ units I think it usually depends on the loan size and lender? Most loans under $1m will require a pg from primary, while most loans over $1m are non-recourse (especially if doing the freddie small balance program). For the second it would usually just be a negotiation point.

@James E.   All of my mortgages including commercial require a personal guarantee.  Yes, they're under $1M.  I've never inquired on the requirements for over $1M.

Back to the OP's point, for any 2nd position seller financed mortgages I've done (when buying), I always provided the lien and the PG, for added security.

@Tom S. Ok gotcha - good to know and thanks for the insight!

@James E.

I agree with Tom, most lenders are going to want both. I know I would, and I'm a lender.

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