Creative financing. HOW?!

5 Replies

Hey there! I have a weird creative financing question for you. Have you ever heard of a deal where the seller carried the financing? Like say I dont have 20% down on a 100000 property. The seller has 100% equity the property or a majority of it. The seller agrees to "gift" the buyer the 20% down by using equity in the house. The buyer and seller agree to pay the 20% back to the seller at whatever agreed rate and time.

Therefore the buyer obtains the property at essentially 0 out of pocket, but is on the hook for a mortgage and paying the seller back? Have you heard or experienced this? How do you structure that as a win win win? Thank you for your time

Absolutely, but the seller isn't "gifting" anything. They may be in a position where they don't need the chunk of cash and by taking payments, they have the ability to make a return on their money. I have done this in several different ways.  How I structure  the offer depends if the property owner lives in the property or not. If they do, they fall under a capital gains exemption, up to a certain threshold, when they sell their home. So, if they are collecting interest, they will have to pay income tax on it, but the principal portion of each monthly payment is tax free. I would instead offer them an above retail price for the property and then ask for a 0% interest rate. There is IRS exceptions to the imputed interest laws that are in place. Please see you tax professional.......if they can't find them, please see a BETTER tax professional........
Essentially, by structuring this way, you have raised your tax basis in the property as well.  I can't finish my thought as I'm on an airplane that's taking off. Hope this helps.

Using seller financing for your "down payment" portion and trying to get a bank to finance the other 80% from my understanding can be tricky. I know that if you are buying a business (not real estate) that the bank will consider the seller holding a portion of the sale price towards your down payment, but they don't like to see that in real estate transactions. If the seller is truly gifting you the 20% the bank is going to want documentation of that. The seller would have to trust you to pay without any legal paperwork. That is what I have been told by my bankers though, maybe other banks have different ways of looking at it.

If the seller has 100% equity the goal is for the seller to finance 100% of the property...not just the DP. The seller would get both the Sale Price and the interest from the financing as income to them...which in most (should read "all") cases, would give the seller more income than their original AP.

@Chris Brenner

If you’re talking about seller financing 100% of purchase price it happens, though probably in situations where the seller and buyer have a close relationship, such as family members, or in situations where the property is hard to sell and the seller is highly motivated.

If you talking of the seller selling at 80% of value so that the other 20% represents the buyers equity, that won't fly as almost all lenders will want the buyer to have a down payment based on 20% of the sale price, not the appraised value. In the old days we used to see a lot of these types of deals, which almost always necessitated misleading the lender. Lenders got tough with this about 20 years ago, and among the various documents borrowers sign at closing are affidavits attesting to the source of down payment. The consequence of lying is mortgage fraud, with numerous parties servicing 3-5 years prison terms.

There are creative ways to make these deals happen, may of these techniques reside on the margins of legality. However, a very simple technique is to ask the seller to take out the largest mortgage possible and then buy the property subject to the mortgage. Of course this violates the due on sale clause of the mortgage, but at this juncture in time that clause is not enforced the vast majority of time.

@Chris Brenner yes this is absolutely possible, I do it all the time. The challenge is going to be finding a bank/lender that is okay with you not making a down payment/okay with the seller carrying 20%. There ARE banks that do this, it's just a little difficult to find. Hope this helps