I was recently listening to a great MHU talk from Abraham Anderson "0-100 lots..." who brought up the concept of seller second lien financing, but I am unfamiliar with how cash e.g. downpayment, is exchanged at closing (and escrow). Can someone please walk me through the process in detail?
For example, let's say a private lender accepts second liens with the first lien being at 75% LTV. Normally on a $1,000,000 park the downpayment would be $250,000. Now if the seller carries $125,000 what are the steps of this transaction?
Clarity on this would be quite helpful as looking at a number of parks and I'd like to aim for a bigger park but has short-term (< 6 mths) liquidity shortfall and prefer not to sell assets or raise from friends/family. This could be a great tool for arsenal!
Wholesaler, Rehabber and Landlord 路 San Antonio, TX 路 Member since 2014 路 2k+ posts 路 2k+ votes
6y
From the title, seller second lien, it sounds like they are saying that the seller takes a second. That would be you get a bank or lender of some sort to finance the 70% or 80% and you convince the seller to take a 2nd for the other percentage. You might have to bring a 5% or a 10% down to the table. The seller is subordinating their interest to the interest of the bank.
A lender is probably NOT going to be the one in 2nd place. They want the first position. The seller is taking 2nd because it is a much smaller amount. Also, they are getting the down payment plus whatever else that their equity is MINUS the 2nd that they are taking.
The way you mentioned it, the bank is not going to take a 2nd to your seller with a 1st for 125k and the bank at 750k.
All you have to do is get the seller to agree to a short term 2nd on the property. They are already getting a bulk of their price from the lender. Just ask the seller if they are ok with getting 80% or 95% of their equity and the other bit in a year or two years or however long you can pay them off. The title company or your attorney will draw up the docs for all that, you just have to get the seller to agree to it.
Wholesaler, Rehabber and Landlord 路 San Antonio, TX 路 Member since 2014 路 2k+ posts 路 2k+ votes
6y
From the title, seller second lien, it sounds like they are saying that the seller takes a second. That would be you get a bank or lender of some sort to finance the 70% or 80% and you convince the seller to take a 2nd for the other percentage. You might have to bring a 5% or a 10% down to the table. The seller is subordinating their interest to the interest of the bank.
A lender is probably NOT going to be the one in 2nd place. They want the first position. The seller is taking 2nd because it is a much smaller amount. Also, they are getting the down payment plus whatever else that their equity is MINUS the 2nd that they are taking.
The way you mentioned it, the bank is not going to take a 2nd to your seller with a 1st for 125k and the bank at 750k.
All you have to do is get the seller to agree to a short term 2nd on the property. They are already getting a bulk of their price from the lender. Just ask the seller if they are ok with getting 80% or 95% of their equity and the other bit in a year or two years or however long you can pay them off. The title company or your attorney will draw up the docs for all that, you just have to get the seller to agree to it.
@Rick Pozos Thanks for the reply! You are correct, and apologies if that was not clear: the bank would be first lien and the seller second.
Quick clarifying question based on your example. So the bank would finance say 80%, and assuming the seller finances %10 (90% LTV all-in) then I'd only bring 10% down at closing i.e. $100,000 on a $1M purchase price?
Rental Property Investor 路 East Wenatchee, WA 路 Member since 2014 路 10k+ posts 路 16k+ votes
6y
I'd become a master at wrap-around seller financing (wraps).
A wrap is where the seller essentially creates a new mortgage that wraps around the existing financing and is subordinate to it.
Due on sale risk is there. Most normal loans have a DOS clause. A MHP loan would probably not be considered a normal loan, but read it .
Mortgagees are notified when insurance changes, so I just got added as additionally insured when I use to buy sub2 or with a wrap. Do some digging on wraps馃憤
Wholesaler, Rehabber and Landlord 路 San Antonio, TX 路 Member since 2014 路 2k+ posts 路 2k+ votes
6y
@Colby Wise that is correct you would bring 100k on a mil transaction. Another problem is that the bank may not want there to be a 2nd on the property. You would just have to check with the lender that you are using. Also, the hard part is to get the seller to subordinate their mortgage.