How to get hard money with seller financing?

Question

I have a project where the seller is carrying the note on the home with a 20% down payment. Now, I need private or hard money to do the rehab but no one wants to be in 2nd position after the seller.

My friend has advised me to get gap funding for the down payment but Im unsure how that plays into the hard money lender?

Purchase: 475,000

Down: 100,000

Seller carry: 375,000

Hard money needed: 150,000

ARV: 850,000

Andrew Postell · Answer

@Alex Jacobson this scenario continues to pop up.  The solution is WAY simpler. I'm not sure who's out there teaching such a structure to real estate investing (I'm guessing someone is teaching it because this keeps coming up) but this scenario is a "normal" acquisition.  Meaning, a normal Hard Money Loan will lend 70%-75% of the ARV....which is more than enough to purchase this property AND rehab it with $0 out of pocket.  There's no need to use so many loan/lien positions that carry difficulties in structuring and require downpayment/money out of pocket.  Keep your money.  Keep it simple.  Depending on your exit strategy you would execute as normal to flip or Refinance after Rehab with the BRRRR Method on this type of a property.  I hope this makes sense as I am describing it but feel free to ask any questions on it.

John Cardinale · Answer

DM sent sir!

Andrew Postell · Answer

@John Cardinale thanks for the response here.  Now, you can use whomever you want to use of course.  And people can do whatever they want...but most of us use lenders that will lend up to a certain point with $0 out of pocket.  None of this 100% Purchase w/80% rehab formula stuff.  Again, you can work with whomever you want but there are plenty that will lend 100% of both purchase and 100% of rehab...as long as it doesn't exceed 70% or 75% of the ARV.  If there's one formula you never forget - it's "What is 75% of the ARV?"  Because that's what the best lenders will lend me on the acquisition and sometimes that's what I will get on the refinance step too...well, sometimes.  I can sometimes go higher...but if I know 75% then I at least have a pretty close approximation of what I can get on both lending steps of the BRRRR Method.

Now, what lender to use?  I have not met a lender that lends nationwide with these types of numbers.  The best lenders are smaller, local lenders.  I can't tell what part of the country you are in but I bet there is one where you are...or one in the market you are targeting.  It is true that in some super small, rural place of America there may not be many options.  But we usually aren't targeting those.  Nothing is definitive 100% of the time...so maybe some people do target that...but the majority of us target cities with options.  More options means more lending, property managers, insurance, contractors, etc. options.  Populated areas.

In my original post I provided a link on how to find good lenders.  Same concept applies here - lean on other investors in your market.  It's not foolproof, but asking other investors in your area who they are using almost always gets us started on the right foot.

How do you find other investors in your market?   Try some local real estate meetup groups.  Meetup.com is a good resource for those but some of the groups will also post here on Bigger Pockets Marketplace too.  Even facebook might have some good local groups for you.  Some of those facebook groups have thousands of members. Eventbrite too.  But post locally for this.  That’s the best bet.

John Cardinale · Answer

Hey John, I have a question about your reply. In your first sentence you refer to hard money and a DSCR loan. In your example these are the same loans right? So just use a DSCR loan from a hard money lender to get to 80-85 LTV? And then for the last part of using seller financing... Can you explain this part a little clearer?

Are you saying you will actually need to possess the 20% difference in cash to bring to the first mortgage closing? and then have the seller lend you that back right right after the closing? Or if the seller is really trusting have them front the money for you to bring to closing and then record the 2nd mortgage right after?

John O'Leary · Answer

Use the hard money to get 80-85% of the purchase price on a DSCR loan, (assuming this is turnkey) and use seller financing for the 20% down payment. Have the seller hold a silent 2nd until the 1st position lender records the mortgage than have them attach the second. You will need to show you have funds but this is a strategy regularly used.

Andrew Postell · Answer

@Alex Jacobson that's it man.  Don't trip up over pennies on the way to be a millionaire.  You'll get there.  Keep digging for the best terms...do put good relationships ahead of strangers...and the further you go, the better you'll do.

Alex Jacobson · Answer

Thank you Andrew. You certainly make this simple!. I have such favorable rates with the seller financing. But I guess a lot of you seem to think that extra cost is negligible if I am refinancing anyway. Especially if that is what it takes to get the deal done. I am seeing that now.

Alex Jacobson · Answer

John when you say them, do you mean the seller or the hard money to attached the second? Thank you!

John Cardinale · Answer

Got it! You answered my questions with the second paragraph. My understanding is that I'd need to have the 20% in cash for closing but could arrange for the seller to put the 20% I need for down payment in an escrow account until after the closing with the Hard money lender. Then a second closing of the owner financed loan could happen that would replace my personal cash in the deal.

thanks for your help !

How to get hard money with seller financing?

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