Seller financing wizards, I need some aid!

Phoenix, Arizona
Creative Real Estate Financing
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Seller financing wizards, I need some aid!

Erik Sanders
Property Manager · Bend, OR · Member since 2019 · 12 posts · 1 vote

Hey BP Community!

I found an incredible deal (a bit out of my price range) but trying to ask HOW CAN instead of can't.  

With some finesse, I got the seller to agree on some creative financing. I so have some questions on how a partial seller carried contract is structured through Title and with a loan legally. Here is the situation:
-Asking price was $1.55M, negotiated him down to $1.4M total
-Financing is through a DSCR loan at 15% down (for an Airbnb)
*my problem is that I only have enough funding for a purchase price of around $1.1M, so I got the seller to agree to carry a contract for the remaining $300k at 10% APY interest only payments until we refinance.

Final terms:Total cost $1.4M (loan for $1.1M and $300k carried by seller)

Questions: Do I need to mention to the bank that the seller is carrying a partial contract? Or would they only need to know that the seller agrees to a purchase price of $1.1M? I do plan to have a PSA with the seller privately with the carried contract terms for the remaining $300k.

Secondly, how would this work through title recording? Does the seller need to get placed as a second lean on the property and be listed on the deed?

Any professional insight would be great here! Home is in Phoenix (85020) for reference!

Thank you all!

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
4y

@Erik Sanders Just ask your lender....they will require you to show that you have your down payment, at least.  They may require proof of where it came from also.  They may or may not allow the seller carried second for the down payment.

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  • Nathan Grabau
    Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
    4y

    I am not a lawyer and this is not legal advice, but this sounds a lot like double or dual contracting, which is illegal in Colorado. Essentially you are defrauding the bank because they do not actually know the terms of the deal they are giving you money for. 

    Now a lot of banks are okay with owner carry backs, so long as you maintain their DSCR requirement with both notes and they have the first position for liens on the property.

    2Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    4y

    @Erik Sanders Just ask your lender....they will require you to show that you have your down payment, at least.  They may require proof of where it came from also.  They may or may not allow the seller carried second for the down payment.

    2Reply
  • Erik Sanders
    OP
    Property Manager · Bend, OR · Member since 2019 · 12 posts · 1 vote
    4y
    Quote from @Nathan Grabau:

    I am not a lawyer and this is not legal advice, but this sounds a lot like double or dual contracting, which is illegal in Colorado. Essentially you are defrauding the bank because they do not actually know the terms of the deal they are giving you money for. 

    Now a lot of banks are okay with owner carry backs, so long as you maintain their DSCR requirement with both notes and they have the first position for liens on the property.


     Hey Nathan, thank you for your perspective here. It is definitely not my intent to defraud anyone. Past lenders have communicated that they factor the down payment calculation by the total price even including carried contracts and I was hoping to use the down payment % on the mortgage note only. 

    That was my assumption as well and I would likely need to be sure and communicate to the seller that they would be in second position with the lien. 

    Thanks so much.

    0Reply
  • Erik Sanders
    OP
    Property Manager · Bend, OR · Member since 2019 · 12 posts · 1 vote
    4y
    Quote from @Wayne Brooks:

    @Erik Sanders Just ask your lender....they will require you to show that you have your down payment, at least.  They may require proof of where it came from also.  They may or may not allow the seller carried second for the down payment.

     Hey @Wayne Brooks thank you for taking the time here. I hadn't considered that lenders might be willing to use the seller carried contract as the down payment on the loan. I figured as the borrower you would need to fund it in order to have skin in the game. Have you done this method before?

    Thanks so much. 

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    4y

    @Erik Sanders The bank might have an issue with the DSCR because you are adding more debt and that may counts against your CR. You will have to ask to know for sure.

    Do you have another property with 300k in equity you can use as collateral with the seller?  That could be an alternative.

    1Reply
  • Erik Sanders
    OP
    Property Manager · Bend, OR · Member since 2019 · 12 posts · 1 vote
    4y

    Thank you @Bob E.

    I did run my numbers factoring in the extra note and the cashflow still yielded a 50%+ percent CoC ROI but you're right, I will definitely check.

    That is an excellent suggestion, I hadn't considered that. Thank you!

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    4y

    @Erik Sanders  When I do loans I tend to do a cash out refi refi on something I own free and clear.  That greatly simplifies the purchase process.

    1Reply
  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 434 posts · 248 votes
    4y

    @Erik Sanders

    1) Yes, you need to tell the DSCR lender about the loan. They will count the payment into your DSCR calculation, and make sure that they allow for 85% Combined LTV. They may have additional price hits, maybe not. But yes, you need to tell them because they will eventually see the papertrail of money.

    2) To be done properly, the seller and you should sign a mortgage Note specifiying the loan size, rate, and repayment term.  You and the seller need to work on that, but all you need to do is ask title to prepare a Deed of Trust and they will record it for you.  Making it an official loan.  That way, when you go to refinance, its a non cash out refinance which is much easier to complete on a rental compared to a cash out refi.

    This type of financing is perfectly fine, as long as it meets the lenders CLTV requirements. Seller carried 2nd mortgage is 100% ok as long as it fits in the lenders eligibility matrix.

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    4y

    I would also recommend offering to pay for a professional servicer.  The protects the seller as they will make sure taxes and insurance are paid, It will allow you to escrow those things if you want, and it will provide a neutral 3rd party that collects the money, assigns any late fees, and coordinates the release of lien when the loan is paid off.

    1Reply
  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 434 posts · 248 votes
    4y

    If this first lender has impounds than the 2nd/seller carry should not worry.  But to your point, if I was the seller carrying a note I would ask for them to impound tax/ins on the first.

    1Reply
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