Why aren't HMLs allowing seller's equity as down payment?

Question

I'm currently working on a income producing quadplex deal in Tampa, FL in which I've convinced the seller to carryback 40% of the purchase price. I contacted 2 guys who lend hard money in my market whom through past discussions have stated that they lend up to 70% of the purchase price. When I ran the deal by them and how I was mapping to pull it ofl w/the hm 1st for 70%, have the seller sign a contract to carryback 40% and the difference between the 60% in hard money funds that the seller was actually going to receive and the 70% that the hml was actually funding, I was going to pay all the deal costs(closing fees, points, etc..).

However, neither guy didn't want to do the deal insisting that I need "skin" in the game.

So now I'm seeking insight as to why HMLs refuse to allow these creatively structured deals to be deployed?

However, neither guy didn't want to do the deal insisting that I need "skin" in the game.

So now I'm seeking insight as to why HMLs refuse to allow these creatively structured deals to be deployed?

Jason Hirko · Answer

I had a good client ask me the same thing last night on a flip he wanted to do. The purchase price was $150k, rehab $50k, and ARV was $300k. I told him I'd lend him $180k (90% of purchase and rehab) but he needed the difference. He asked if the owner could hold back the $20k from the sales price, and for the same reasons already mentioned, I had to say sorry, but no. We kept discussing it, and came up with the following solution from him. My client and the seller set up a joint venture, they both co-sign on a loan, I'll lend the $50k in rehab (I'll do 100% because the seller is pledging the house as collateral), then when it sells, the loan gets paid off, the seller gets his $150k for the house, and then they split the profits equally. That's how a lender can get creative and still be able to stay in business.

Roy N. · Answer

@Rodney Dixon

What's your experience and track record in these types of "creatively structured" deals?

No lender is going to be in a hurry to put out money on a property where the only people with (skin in the game) would be them (the lender) and the Vendor (now a lender through a carry-back), and the guy in control of the asset (you) has no capital in the deal ("skin in the game").

Unless you have a long and stellar track record, it would be very foolish of them to make such a deal and they would not be in business long if they took-up the practice.

But, to your credit, it never hurts to ask ... just do not be surprised or offended when the answer is "No!"

Jaysen Medhurst · Answer

Hi @Rodney Dixon, if you don't have a track record and/or relationship with the HMLs, it's foolish to think you can go in with $0. Apologies if that sounds harsh.

Look at it from their perspective, you have nothing at stake. If things go bad you can walk away and lose nothing. They don't know you and can't be sure you won't bail at the 1st bump in the road or if another shiny ball bounces in front of you.

Just as importantly, you trying to finance 110% (40% from owner + 70% from HML). That raises a HUGE red flag. You could just take the extra 10% and skip town.

Rodney, true "no money down" deals are extremely rare. Especially, for a novice with little experience and few relationships.

Can you partner with someone who has money to invest? Say 20% of the deal and split the profits. 1/2 of a good deal is better than 100% of no deal.

What about buying the property yourself using an FHA loan and then turn it into a full investment after living there for a year or 2?

Jay Hinrichs · Answer

@Rodney Dixon  100% leverage is a no no post 08 GFC at least if you want to stay in the business

the other reason an astute lender in FLA knows that

foreclosures there take a year or more and if they are contested multi years. and if you default their only way to get the collateral is to foreclose out the junior lender.

you need 100% owner financing in this situation

this is why when owners finance but want a large down it really does not mean anything to the investor who does not have a downpayment.

Rodney Dixon · Answer

Nice play!

Jay Hinrichs · Answer

@Rodney Dixon  you can ask but one would need to write a book on that. and or get paid for that advice.

Rodney Dixon · Answer

Thanks to all for their share on the subject and Jay I want to single you out on your response and asks you for some guidance on these 2 things:

1). A list of states w/large transactions of owner financing

2). Cost effective methods for reaching leads in those states

Why aren't HMLs allowing seller's equity as down payment?

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