Will the bank go for this arrangement?

Question

I'm trying to get a 6-unit apartment complex. I can't technically afford the down payment. I'd like to get the sellers to finance the down payment.

I have some money sitting in my account that I received from a HELOC on another investment property. ALL of that money has to go towards the debt on the property, and there's no way around that. But if the bank wants to see I have the cash for a down payment, I can let that cash sit in my account a little longer.

My concern is that the bank will want to see me actually hand that money to the sellers. Is there any way to make this plan happen?

TIA!

Joel Florek · Answer

@Nicole Heasley Like @Jeff Copeland has mentioned, you will be able to do this with a bank mortgage in 1st position and a seller mortgage in 2nd position. I have closed an 8 unit and a 16 unit where I went 80%bank 10% seller and 80%bank 17% seller respectively.

A few notes. To increase the likelihood of executing this you will need to work with the commercial side of a small/medium size local bank. Call around, ask to talk to someone in the commercial lending department and quickly run them through the high-level financing pitch to ask if its a loan type they would consider. I usually through the phrase of, "I understand every bank defines the "box" differently for what type of loans they are willing to consider. Im curious if a deal I am assessing would be a loan that your bank would be willing to consider." Then explain the deal structure in a few sentences. You can call a dozen banks within an hour and you should be able to find 2 or 3 who you can bring them additional details on the deal and your personal financial statement.

On the seller side you will be more successful if you offer terms that allow them to get out of the deal sooner. My 16 unit I did 36 months balloon on a 10yr amortization. This has allowed me to rapidly pay down debt so that I can refinance. My 8 unit had only an 18/month balloon on a 20yr amortization but I know with my line of credit and reserves I could pay him back at the end of the balloon. The 16 was far too large of an amount for me to be able to pay back in cash so I had to plan for a refinance.

To piggyback on the advice from Jeff, always be 100% honest in how you are structuring the deal. Everyone will know how things are structured whether you are upfront or it comes out when the title docs get sent out. If you wait your deal will die a terrible death and could easily put yourself in a position to be sued. If you are honest, it should be a pretty easy process. PM me if you want to talk more details on the nuts and bolts. This is how I have grown my portfolio and it has worked out great for me.

Jeff Copeland · Answer

Seller financing the down payment with a second position note may be possible with some lenders.

What probably isn't going to fly is pretending you're going to use the cash in your account for the down payment, but trying to sneak in a private mortgage note with the seller instead. Both mortgages (the bank's first position note, and the seller's second position note) would normally be prepared executed at closing in a situation like this.

Your HELOC cash can certainly be used to show you have the necessary reserves on hand to meet the bank's underwriting requirements, but you probably need to be above board about the seller financing and find a lender who is okay with that.

Nicole Heasley Beitenman · Answer

Thank you both! I asked around and got 6 or 7 referrals for investor-friendly lenders in the area. I plan to call them today. @Joel Florek, I'm PM'ing you now. I greatly appreciate the offer!