How does it work when the seller financines a portion?

Question

If I were to set up a deal where the seller was going to write a note for 60% of the property and I would need to get financing on the other 40%, how would that go? Does the bank ask me to put a percentage down on the 40% or the total sale price? How does the note held by the seller affect my DTI ratio?

I honestly just stumbled upon a possible deal and I really don't feel like I am ready to put it together. It is just words being tossed around, but my childhood neighbor just put a for sale by owner sign up, and he would most likely do some flexible negotiating with me. I assume the house is paid off or really close to paid off. AND T-mobile has a cell tower nearby which they stationed their equipment in his shop, which he told me is a $600 income. A house like his would rent for $1400. (Seattle Area) I plan to go talk to him later to discuss what his goals are. He's single and about 50 years old. I think he might hold a note to create some income. His marble/granite business has been doing poorly (which I used to work at).

Anyway, I got excited ans started talking about the deal, but the above questions are what is on my mind. If he needed a lump sum of cash (which I don't have much of) I'd have to finance that portion. We'll figure something out...

Paul B. · Answer

Generally speaking, if you are getting a bank loan, they will require you to put 20% of your own money in the deal, and you can't borrow that. You'll need to show that you have previously had that money on hand, too; it can't have just magically appeared overnight.

Any seller-held financing is going to affect your DTI since the bank will know, from reading the contract, that this debt will be in place.

I think the only way you're going to get this place for no money down is if the seller holds a note for the entire balance.

If you think there's going to be some appreciation in the future, you could tell the seller to give you an interest-only balloon for, say, 5 years, at which time the property should have appreciated enough for you to refinance and pay off your seller-held note. This at least gives the seller some hope that he'll get cash sooner than later, assuming that's what he wants. Could be he'd be happy to lock in a 6% yield. Gotta ask.

Good luck, and let us know what happens.

Bill Gulley · Answer

Hi, some wild stuff here, one the cell phone rental: The 50% Rule does not apply to such rental income, it's a ground rent, not a building with tenants in it.

You need to assessthe value of the leased grounds and the lease as if it were a seperate piece of property and then assess the value of the other peoperty as a rental.

Having granite everything will probably not be common for the area. If I were you, that is one of the first conversations I would have with him, does he realize that he has "overbuilt" his property for the area?

As to financing. Talk to your bank, while 20% is generally required for non-owner occupied, they can go 10% overall booking this as commercial. The lease is key, and you would need to assign the lease as collateral (together with all other leases anyway).

Going the ways suggested, you'll be asking your investor to take a thrid mortgage and more than two mortgagees is usually not something a bank wants to get into, while there is nothing wrong having ten mortgages, if something goes wronge party the bank needs to go to with notices and and any take-out option not to mention a possible default on the third and having their mortgage either assumed or paid off.

Use an LLC, between you and your investor, in the operating agreement, you put the investor in a limited position, basically as a limited partner. Agree to indemnify him for any losses, Allow him to loan money from his capital account and the LLC pays him. He will own the % of the property to his contribution. Then you do a buy-out or option for you to buy his % of the LLC.

Ask the seller what he would like to carry, not so much how much he wants down, ask if he would carry 40 or 50 or 60%.

Go to the bank and have the LLC purchase with the investor. $600 of your payment will be assigned to the bank, it will be viewed too on the credit worthyness of the cell company, that should be strong and like gold if it is a US carrier.

The chance of you losing your cell tower lease will be slim and none, because the cost of removing it and acquiring a new site together with putting one up could be many times the value of  your land, so they are not going anywhere. I'm surprised it's only a two year lease, usually much longer.

To sweeten the deal with your investor, offer the tax advantages to him, since if you are starting out, you probably don't need them say in the next 3 to 5 years, maybe 7. His option in selling his interest can be made today and keep the interest rate lower on that retun to him in the LLC, but the interest is offset with a premium.

The option can be made the day after closing too.

To the bank, the loan is to the LLC, so there is no debt service viewed for that investor money, just on the first and the second to the seller. It's a cleaner deal for the bank.

You need an idea of what the seller will carry back. Point out his tax advantages of gains being paid out as received, not all at closing and his interest income as you mentioned.

You can also do this as purcahse, note and sub-2 or as a contract for deed. But a straight sale is better IMO since the payoff is so low. If your seller has paid as agreed, contact his bank for financing, they liked the property or they wouldn'tt have the note.

I'm assuming this is in the country somewhat with a few acres. That might open the door for other types of financing (USDA?).  If you do need assistance of any kind, you should be able to get free assistance from several here on BP. Good luck...

Bill Gulley · Answer

All the better, and better yet if the seller realizes he has the junker on the block, I assumed he would be proud of his work and improvements, but he has probably been in more expensive homes, being in the business.

Simply assess the property as I mentioned, but since it is in the city, you probably can't divide anything, and bank financing will be the option. Realize to that the property will never go into the secondary market with a cell tower in the backyard.  I would think that having a cell phone tower in town on your property is not too desirable for an owner occupied later on. It will probably always be a rental with this external obsolesence.

Comp it out, review the cell phone lease very carefully, if any doubts have an attorney review it for you. Review any other leases. You mentioned a shop building, check the zoning and do your due diligence.....let us know how it goes! Good luck...

Bryan Hancock · Answer

You can offer to pay him some of his equity up front and he can tote a 2nd for the rest.

How much cash are you working with for this deal?  If you let us know that I can help you design some offers to present.

Joe Edwards-Hoff · Answer

Since this thread has gotten a bit off of its original topic, I made a new thread that specifically deals with this. See link below-

http://www.biggerpockets.com/forums/12/topics/60363-help-em-form-my-offer-sfr-with-cell-tower-income-

Joe Edwards-Hoff · Answer

I don't have time to give a full reply, but the property is in Seattle Washington. In the city. It is in a fairly desirable neighborhood too. His house really is the classic one you read about in the investing books. It is the junker in the nice neighborhood.

Paul B. · Answer

Another potential option is that the seller could take back a note and then sell it (or a part of it) at a discount to get his cash out faster.

Bryan Hancock · Answer

Sounds like a good idea given the uncertainty of what he wants.  You need to figure out what the thing is worth though.  It doesn't sound like a great rental absent the cell income.

When you know more about the numbers please post them.

Joe Edwards-Hoff · Answer

I'm still trying to read him. If anything new arises I'll post it. He literally just put up some FSBO signs yesterday. So he may decide not to sell. Maybe he just wanted to get a feel. Though when I went over to chat with him, he asked me if I was interested in it. We talked about his plans. I'm also trying to see if I can "help" him out as well. I'm trying to get him to think about his own exit strategy, so I could better structure an offer that would fit him. I told him I'd crunch some numbers and just throw out an offer, that way if he was serious  he'd have something to look at. After looking inside, I can tell that there would be some serious rehab work. The guy is a bachelor granite worker, so his house has marble and granite everything... Some a little over the top.

I'm going to try to give him an ABC offer (I foget where I learned that). A-I find 100% financing and offer a lower price. C-He provides 100% financing and I offer my highest price. And B- An offer or two that falls in the middle.

Bryan Hancock · Answer

Well you are going to have to offer one heck of a big discount to him to make the property "cash flow" according to the rules of thumb cited on BP.  I am not sure how solid the $600/month cell phone income is, but the other revenue needs to be divided by two roughly.  If the property rents for $1400/month and you divided by two to get "NOI" that would leave $700/month.  The other $600/month would give you a total of $1300/month.  If you capitalize $15,600 annually at roughly 10% that would put your offer at $156kish.

I am guessing that the market is paying below 10% cap rates in hope of some appreciation though.  It would be nice to see what the market is paying based on comps right now.  At a 6% capitalization rate your value would be $260k.

Without real values offers are tough, but let's use $200k for grins to make the math easy.  The seller has sales fees, title fees, holding costs, some form of markdown, etc. if they market, list, and sell through a Realtor.  15% is generally pretty easy to knock off of your offer to account for all of this.  That would be $30k in this example, which would reduce the $200k to $170k.  If you take away the $25k owed we are down to $145k in "equity" that the seller may be expecting based on a $200k valuation for the property.  You want to buy that equity at a discount and use his loan to finance part of the transaction.  If you offer cash you can offer a 2:1 cash for equity trade.  You can also offer some cash at 2:1 and the rest financed on some terms agreeable to him.

I am assuming he may want more than $10k in cash up front.  If this is the case you need to find out how much and see if your investor buddy can come up with however much you are deficient.  If he can you may be able to structure a note to the investor to pay the seller for some of his equity up front.

There are really too many variables at this point to know if any of this will work.  You need to find out what the seller wants and what cash you can summon.  If you can get a big discount by offering all cash you may just want to try to sell the contract to another investor too.

What is important to the seller?

How does it work when the seller financines a portion?

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