Seller financed down payment

[Nate Bartow]

Hi everyone, Anyone know any creative ways to finance if the seller is willing to finance the 20-25% down payment? I'm looking at a deal where Fannie Mae will finance 75% of the deal and the seller is willing to carry a second for the 25% down payment but FM will not allow te seller's second. I was thinking an owner equity deal maybe where the seller "buys" 25% of a new llc and pays the down payment for that percentage of ownership. Any suggestion are appreciated! Thanks

[Bill Gulley]

Originally posted by @Sean Price:

ok, here is a theoretical idea. I am new to this so don't take this as advice, more of a question. Could you and the seller form an LLC with the seller maintaining 20% ownership in the property. Then the seller is not a debtor, but has an equity position. Then after getting the loan and financing, the seller could be bought out at a predetermined buy out price (maybe after the property is capped out and refinanced.

Could this be a potentially legit strategy?

The seller has a property in a business entity? If not, he can put it in one. He'd be refinancing. He most likely will have a personal guarantee on that loan. Then you can buy into that business entity, being in that entity you can manage the property. An agreement to purchase the LLC shares can be adopted in the operating agreement. The seller can go on vacation, but will be on that loan until it is paid off unless a lender agrees to release them and take the new member as the sole borrower, not likely. Also, you can manage that LLC, be paid, earn your way in over time, but if you remove that seller from the LLC entirely as the owner of that property and the loan is made to the LLC and that "seller" a beneficial interest has been transferred and the lender may call your loan due, the "seller" needs to be in the LLC, but doesn't have to be active.

Refinancing is a different animal than buying, the LTV for a cash out refi will be lower, 70/60 maybe 50% with a bank, if they will do it at all. I suggest you not do your LLC purchase the day after the refi either, give it some time to cure so that your long range plan is not tied immediately to yesterday's loan. A member retiring is fine, moving out of management is fine, but you did represent to the lender that you were managing and active in that entity, they are giving "you" the loan.

Now, before folks get "creative" need to know what is legal, not guess and know what alternatives there are using inside the box techniques. Mentioned was the 10% down, 15% carry back by a seller and 75% from a lender, that is customary as a "purchase money" transaction.

When you mix bank financing or any agency that carries any federal loan guarantee you are subject to mortgage fraud issues. Mortgage or bank fraud is different from civil  or criminal customary fraud matters where intent for some financial gain might be required. With bank fraud , any statement or omission which misleads an insured lender in considering relevant facts concerning any loan or business transaction is evidence of intent, the lender does not have to suffer an actual loss. Not disclosing liabilities or contingent liabilities or expected liabilities known to be made in connection with a transaction or after that transaction has closed what was created from or in connection with that transaction can constitute fraud.

There is no way around it, on a loan application you are to provide your assets and liabilities. Any liability known to be incurred arising from the transaction is a contingent liability which is also asked. Next, point blank, the question, "is any part of the down payment borrowed", is on the standard 1003 application. A down payment can be borrowed in certain cases, but it must be disclosed and approved. Under IRS Code, all real estate transactions must have an accounting of all funding and expenses, single family residential are accounted for with a HUD-1, you can use the HUD-1 for commercial requirements but it's not required to be used. Not showing borrowed funds is not a proper accounting of a real estate transaction, so, you're in violation again. That will go to seller financed transactions where any lien is made in connection with that property.

Doing seller financing, you're not subject to banking regulations but to civil and criminal aspects of fraud, showing or telling a seller something that is not true can still be fraud in that transaction where that seller relies on the financial information given to determine if they should extend credit. The transaction still needs to be properly accounted for with seller financing.  Why not just have the seller do 100% financing and they may take additional collateral?

I prefer seeing an installment sale of a business entity, that can be structured hundreds of ways, it's not a real estate transactions but may have tax transaction matters and such are not made of public record until shown with the Secretary of State as officers/directors/members or  owners. :)