Creative Seller Financing on Free and Clear Owned Apartments

[Michael Opdyke]

I am marketing to owners of free and clear apartment buildings and showing them the benefits of Seller Carryback Financing. Assuming the seller only requires a 5-10% downpayment, I've been thinking of using a bank loan instead of pooling investors for equity. I know that typical bank/seller financed transactions are 75% Bank/15% Seller/10% Equity , but what about turning this upside down at an even higher leverage of 90% Seller/10% Bank?

The bank would demand first position so the Seller would have to be OK with being in second, but not being able to pay off such a low payment to a bank would be nearly impossible, so the risk of default is to the second position seller's note (as with everyone else I would avoid default at all cost). If I can't pay the seller's second position note, they could take the property back (same recourse as if it was a 100% seller financed transaction), but would be on the line to pay the bank's first position note with cashflow.

Since the bank is at such a low LTV, I would think they would be open to even funding capex, so on a property with a good amount of deferred maintenance and potential for unit upgrades, let's say they loan at 25% LTV to cover all these costs

Now, I know I will be warned about using so much leverage, but if I can keep the total DSCR over 1.4 I would feel safe. The way I could make this work is a 3 years I/O from the Seller, and make sure I am buying a property with undermarket rents and ability to force additional appreciation. I would ensure that I could conservatively underwrite a 1.4 DSCR in 3 years based on bringing rents up to market without even considering additional rent increases from upgraded units. If this sounds crazy, I believe I found a decent sized property that fits this bill but want to secure my plan for coming up with the downpayment. I've also considered using investors but I could pay less of a return to the bank AND keep all the equity, especially for only a 5% down payment.

Please let me know if you think a bank would be willing to loan at 25% LTV, and what objections a seller would have.