Newbie Needing Help: Partial Owner Financing

8 Replies

I am an aspiring investor and have spent the past year listening to the podcasts (currently on episode 216!), reading books, analyzing deals, reading through the forums, driving neighborhoods and so on.  I have been completely plagued by analysis paralysis and am finally attempting to put an actual deal together!  I am located in Parker, CO (just South of Denver) and have focused my search to Colorado Springs as the market is somewhat more affordable than Denver, it is within driving distance and I have family in the area.  It is actually a family member's property that I am trying to put the deal together for.  My grandparents own (2) properties, their primary residence (paid off) and a rental property on the same street (has a bank loan with substantial equity).  It is their rental property that I am looking to structure the deal on.  My question is; how difficult, or how likely, is it to structure a deal using partial owner financing?  My idea was to obtain a bank loan to cover the outstanding balance on their current loan and then create an owner financed note for the remainder of the purchase price.  Will the bank have any issues with the second loan?  I would imagine the owner financed loan would take second position to the bank loan, correct?  How does it look if the owner financed loan is structured for interest only payments?  Would we just add a clause for a balloon payment after so many years?

I have recently finished reading No/Low Money Down and am trying to stay creative with my financing options but also want to make sure I fully understand the process and want to make sure that I am able to present a deal that is a win/win for both of us.

 This is my first actual attempt to make a move towards a deal and am looking for a little advice/guidance from any of you experienced investors out there!  Thank you in advance to anyone who is willing to share their wisdom!

@Jon Ankenbauer the short answer here is yes, the bank will not like having a 2nd lien in place when you purchase an investment property - especially if you are financing 100% of the purchase price. Conventional loans will lend up to 85% of the value of the property.  There might be some other loan types that lend slightly more...but most banks don't like seeing 2 loans on an investment property.

I might have a better way for you to structure this though...do you have any assets available for a down payment?

Andrew Postell, Lender in Texas (#392627)
817-873-0621

Hey @Andrew Postell , thank you for responding!

Yes, I do have plenty of cash in savings for a down payment.  

@Jon Ankenbauer - Unfortunately traditional lenders will not go for this sort of deal. They don't like to see seconds when you first purchase the property and you cannot use seller financing as your down payment for the first. Most portfolio lender also like to see that you have some "skin in the game". 

Have you considered assuming the loan? While this is less common right now, some loans are assumable. My prediction is as interest rates and prices continue to rise, we are going to see people assuming loans more often. 

Another idea would be to seller finance a portion and take the property "Subject To" the existing first. MY disclaimer here is you really need to speak with lenders, CPA's, and Attorneys over this idea as I am none of those, only a Realtor. 

I would be curious to see the numbers on this. Most 100% financed single family properties these days will not cover the mortgage and expenses. 

I think if you really want to make this work and numbers work its possible.

Colin Smith, Real Estate Agent in CO (#ER.100052152)
719-232-6709

@Jon Ankenbauer speaking from a lenders point of view, the seller carried seconds went out some time ago with most of the main buyers of mortgage loans. There are some creative options I bet you could think of with family though. My sister and father did something very similar to transfer a property and get my parents paid while beginning her RE investing career.

I’m in Parker too. If you’d like we could go to Fika and great a cup of coffee?

Thank you for your insight @Colin Smith !

I had not thought about assuming the loan.  I will have to take a look into that option a little deeper.

I also like the idea of seller financing a portion and taking the property "subject to". My goal in the structuring of the deal would be to ultimately leave my grandparents with a passive cash producing asset so that they still have the benefit of the income without the hassle of being a landlord.  That was the reason i originally thought i could combine the seller financing and the conventional loan.

Thank you for the help!

Hi @Jeff Zinsmeister , I would love to meet up and grab a cup of coffee! I would be interested in hearing the options you think might be able to make this work!

I will reach out through PM.

@Jon Ankenbauer a couple thoughts. 1) If the original loan is a conventional loan through a mortgage company then it is highly unlikely that the bank would let you assume it. Just asking about that can create issues if you then move on to do some sort of creative financing. 

My suggestion would be a wrap as opposed to a subject 2. Just create a note with your grandparents and then they continue to pay the existing mortgage and keep the difference. You can even set it up with a servicing company so everyone knows that the payments go where they need to. Remember as people age they sometimes forget to do things and you don't want them racking up fees by forgetting to make payments. In addition, that lets them be in the driver's seat if you don't make payments. 

If you go that route, get an attorney to help you.

@Jon Ankenbauer I’m going to guess that the mortgage has been paid down over a while now.
There should be some equity built up since you are talking about a second mortgage. All you really need to do is get a loan to cover the old mortgage. As long as it’s 70% of the value of the home or less, you shouldn’t have a problem. Once the financing is complete and closed, make the second mortgage with your grandparents. The bank can’t stop you from taking a 2nd Mortgage after it’s purchased. As long as the bank has first lien position, they are golden. A Heloc is 1 example of a second mortgage. The only issue you will run into is a Ballon Payment. If you go through a lender that will allow a 2nd, they will not want a ballon attached to it. I deal with a lender in Pueblo that may allow you to do a second as well if you put a little skin in. The 2nd Mortgage holder has to sign a document stating they understand they are a 2nd Mortgage and not a 1st

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