Lender plus Owner Finance on an STR - is it possible?

Question

I have an opportunity for a solid STR in the Catskills of New York, but it has a few hurdles. 1. It's rural 2. It would be an STR 3. The owner is willing to finance, but wants a 50% down payment (75k).

I've asked around, but so far have had most people say it's too rural or they won't allow a lien against the property behind their own.  Am I searching for a unicorn lender?

To be clear, I'm trying to put no money down, having the lender fund 50% and the owner "fund" 50%. It's not because I don't have the money for a down payment, I'd just rather save it if possible for another deal.

I would love to hear of any similar personal experiences, advice, or lenders out there who might be interested in this deal.

Thanks BP!

Don Konipol · Answer

I think we need to be clear here. Almost all lenders will require the borrower to sign a statement to the effect that the down payment is not borrowed money.  Utilizing a “silent” second is mortgage fraud.  If a lender doesn’t have this document requirement, then the borrower utilizing a second mortgage to purchase would be most likely merely violating a provision of the mortgage or deed of trust which is of no criminal consequence, unlike mortgage fraud.  The borrower is under no obligation to advise the 1st lien holder of the existence of the 2nd lien; in other words “no harm no foul”.  However, the mechanics of putting the scenario in effect are far from easy or clear because the title company will have instructions from the lender not to fund unless the borrower provides the down payment in cash, not in a seller financed 2nd lien.  So, money will have to come from somewhere or someone.  The more people involved in the transaction the more difficult to keep the “real deal” under wraps.

Adam Windham · Answer

if there is a value add component a hard money lender is probably the way to go, you're going to want something short term anyways so you can refinance of the new increased value once the improvements are complete.

Evan Holly · Answer

@Adam Windham Thanks for your response.  I know now the DSCR is what's making it so tough.  I'd try 2nd home, but I already own a primary in town. There's definitely value add, so that's an option as well.

Adam Windham · Answer

if there is a value add component you might be able to find a local or regional hard money lender that would allow a seller second behind their first position lien. No DSCR based lender will allow this. Possibly some kind of conventional product would allow a second position lien, but even those options have cumulative loan to value limits that you cannot exceed so 100% financing would be difficult to achieve.

Evan Holly · Answer

@Josh Surver messaging you now!

Josh Surver · Answer

@Evan Holly I’m a broker lender and recently ran through a scenario with a client who wanted a VA loan first and seller financed second and the underwriters were fine with the seller financed second as long as the borrower had the skin in the game normally required of the loan program (in that case nothing). I’d have to check the scenario with FHA or conventional products, but I get the sense you’d be able to do it. Let me know if I can help.

Christian Ehlers · Answer

John is right on here, we are thinking the same overall strategy.

Often this lender doesn't care as long as their 1st position loan looks good to them. You can tell them but it might make for more hoops to jump through. One solution is to create an LLC with the seller as a partner which will satisfy the lenders requirements for them to have a seller finance note in 2nd position.

Evan Holly · Answer

@John O'Leary Thanks John!  Ok, that sounds like a good way to make it happen.  Simplifies it a bit in my head for sure.

Evan Holly · Answer

@Christian Ehlers thank you!  I know of the Morby method and love Pace but sometimes question the reality of making his methods happen.  From what I've seen from his example of the Morby Method, he doesn't let the lender know.  That part feels a bit strange to me, and I'm also not sure how to navigate a close in this case.  I do appreciate you throwing that out there though, builds some confidence in this method for sure.

John O'Leary · Answer

I would see if you can find a lender to do the 50% in first 1st lien position then have the seller finance the other 50% with a silent second, or record the 2nd position after you close. If it's long term financing it may not be an issue. If you are trying to secure in a bridge loan, and rehab the property, and the seller records the 2nd lien the lender may freeze the rehab funds.