Can owner financing be combined with bank financing

Question

A number of books talk about using owner financing when buying apartment buildings.   Is this something that actually happens very frequently?  It seems like most owners would want the cash.  I can imagine some being ok with partial owner financing.  I was thinking it would be great to get some help with that 20% down payment needed with the commercial lenders via partial owner financing.  However, the commercial lenders I have spoken with have not been supportive of partial owner financing.  Has anyone found commercial lenders that have been supportive of using owner financing for part of that 20% down payment?

Brian Burke · Answer

@Gabriel Miller finding a good apartment deal is like finding a needle in a haystack. Finding a good apartment deal where the seller is willing to owner finance (and isn’t getting offers at just as good a price without it) is like finding a needle in a stack of needles. There’s one out there somewhere, but you could spend a lifetime looking for it. A few people get lucky and find one, and it’s such a unicorn that they all write books about it which leads people to believe that it happens all the time.

In my opinion you’re most likely to find owner financing when the property is overpriced, in a bad neighborhood or in a bad economic area, in remote locations where there are few buyers, or have severe physical deficiencies.

In a separate category are the instances where the seller is willing to carry back a portion of the purchase price, such as 10-15%. You’ll find more sellers willing to do this than carry all of the financing, but still only a relatively small percentage of sellers in today’s market unless the factors in the above paragraph apply.

I bought my first multifamily property this way—75% or 80% from a local bank (its been so long I can’t remember), 10% from the seller and 10-15% from me in a 1031 exchange.

But that was a long time ago.  Nowadays lenders are more pessimistic about allowing secondary financing which makes the whole idea a non-starter. I suspect that there are lenders out there that will allow it, you just need to find them.  Back to the needle in the haystack again...call every lender you can find until you find one that gives you the answer you are looking for. I’d start with local and regional banks.

Todd Dexheimer · Answer

I have done seller carry backs and contract for deeds many times and find that there are many sellers willing to do it. Brian is right - finding deals right now is like finding a needle in a haystack, but I would say the seller financing is not as hard to get as most people will tell you. Most people don't ask and therefore, don't get seller financing or any kind.

For the banks - most will want at least 10% down from you and still a 1.2 DSCR with their loan and the seller carry back. Many banks may not even allow that.

James Hamling · Answer

@Richard Appleby All but universally banks will not credit that owner financing as you down payment requirement, they will simply credit as a reduction of purchase price, there in slightly decreasing your down payment requirement AND that payment add's to the calculations on that side for viability.

Short version is, it looks really bad to a bank, it looks like a person who does not have financial capacity to purchase a place, is trying to leverage to their eye-balls to get the place, making it monumental risk for the lender. Remember, purchase is just the 1st capital requirements a lender wants to see for REI property, they also want to see capital reserves, so you can stay afloat for those expenses that can and will happen.

If your not capable to correctly purchase a duplex, you really shouldn't be, that's the cold hard truth, getting over-leveraged in a property is making yourself a target for, and inviting, problems to happen. It's best to take a step back, look at what your finances DO afford, and how to make that a stepping stone, banks reward those who take smart steps and fear those who ignore caution and play roulette with their money.

Richard Appleby · Answer

@Todd Dexheimer

Thanks for replying and offering that advice Todd!

Richard Appleby · Answer

@James Hamling thanks James!

Todd Dexheimer · Answer

You will need to find a lender that will approve a seller carry. Most will not. Call your local banks near you to see if they allow for a seller carry back to be in 2nd position.

James Hamling · Answer

@Richard Appleby

The A-B-C offer, smart, seems you've done some sales research.

For that I'd say run with an all terms, partial terms, and standard close offer.

Richard Appleby · Answer

@James Hamling

Thanks James.

I agree with your words of caution. I am planning on using my local bank and they can see my financials are very strong to cover the 20% down payment almost 3x over.  My interest in the seller carry back portion is because I wanted to submit 2 offers: I could offer my main offer with a low purchase price or an offer that included partial carry back of a portion by the seller for closer to asking price. All of this is to increase the chances of getting 1 offer accepted. Just thought I would include a clearer picture in my response.

Richard Appleby · Answer

@Todd Dexheimer

Hey Todd, I'm over in Hutchinson MN and am looking at offering on a duplex. 1 offer I would like to make is having the seller carry $10k of the purchase price (this would significantly increase my cash on cash return). Can you expand upon how that would look for structuring with a bank loan. Currently my local bank is 20% down payment, 3.5% interest. This would be my first rental property.

Can owner financing be combined with bank financing

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