Can you insure a note on a second mortgage?

Question

I found a great property with good income but bad cap rate for the location. Current owner over spent to rehab the small multi. The area is a c area but owner rehab for a area.

Listed for sale for over 18 months, over priced. For over year seller and I have been going back and forth. Finally  I ask seller to carry a note for 20% of the purchase price. The seller agrees but his partner (the wife), is not on board with the idea. Does anyone have any suggestion how make the second mortgage secure either insure it or something. The partner issues is that they used their saving affraid that I dont keep my promess t and they lose everything.

Chris Martin · Answer

No money down. What a concept. Give the seller a personal guarantee.

Dee Xixi · Answer

I guess need more help than I thought. Can anyone help me please structure this owner carry second.

Here is the number and scenario.

Purchase price: $255,000
Unit : 7 units 
Bedroom: 5 ( 2 Bedroom) and 2 ( 1 bedroom)
Occupancy: 6 out of 7 in the last 6 months
Income:                         $55,200
Total Expenses              $21,657
Expenses as % of GOI      39%

According to the local lender, 80% of the appraisal or 205,000 for a first loan. they are comfortable that seller carry second as soon as 1st and 2nd  does not exceedi 95% of the value.

Seller agreed to carry 45k for 36 month @ 9%. But want personal guarantee. I suggest instead that carry second to create a promisory note to the purchase LLC

So now i need to structure this to present to the seller, any advice on how to sound professional, clean and convinceable.

Bill Gulley · Answer

That is thin for the seller. IS your partner willing to help rather than skin you? If so, he might simply agree to step in as a guarantor and not a partner for a small slice of payments initially.

Is there a property manager involved? If so they can collect rents to a joint account. You'd need a disbursement agreement with the seller not to withdraw funds unless there is a default, in such event it could cut you out of your signture authority. Basically a partnership arrangement with a UCC filing on the account.

Work on him and ensure him on the deal, let him work on her. Good luck :)

Dee Xixi · Answer

@Bill,
Total purchase price : 267k
1 st mortgage: 205k
Seller carry second: 45k
I come up with 17k.

This is not my first deal but every other investments are with partners. Therefore it is a dilemma for me to give him an interest in an other property.

Bill Gulley · Answer

Andy, you might better explain "close first and then take on that second mortgage" since it's a seller financed second, attempting to finance after a sale is 1. impossible as to funding an equity amount, and 2. leads to mortgage fraud and RESPA violations if not disclosed prior to that transaction.  :)

Andy Chu · Answer

keep in mind a lot of lenders will not lend beyond 95% of CLTV (combined loan to value). you may need to close first, and then take on that second loan. I don't recommend this option. talk to your first lender and see what their cltv is .

Bill Gulley · Answer

Are you trying to get 100% financing? Are you putting anything down as that usually is the basis to assess your skin in the game and your expertice, the assurances of professional management of the deal gets you over most issues, IMO.

You can add additional collateral as Chris suggested. You should put a loan servicing company in place for collections and servicing, this can make things easier on the lender.

You might use a stronger credit partner, a loan guarantee can help.

Are you qualified to finance but prefer the seller financing, showing that ability to refi will probably help.

If this is your first buy and hold, or you have limited experience, a property management company can help solve maintenance issues, tenant selections and rent collections.

And, perhaps the transaction you're asking for is not sufficient, but for suggestions more info is needed.

There is no loan insurance program for privately held notes.

There are other options, but there is not enough info here, like value, sale price, amount of the first, amount of the second, down payment, your use of the property....etc.  :)

Chris Martin · Answer

Sounds like a property you may not want... but to answer your question, you can add collateral to the second to make it more attractive. That may be hard to do if you don't have any other collateral. Get creative. Other examples: add personal property collateral (titles to vehicles, boats, etc.) establish esrow accounts via third party (attorney), etc.