Conventional Loan with Seller Carrying a 2nd?

Question

I came across a property that is FSBO and the seller is willing to carry. I want to know how I can structure the deal to put the least amount down while also using conventional bank financing (strong credit, steady W2, etc.). If I was going through a bank I would expect to put 20% down. However, I would prefer to not tie up 20% and save capital for improvements, etc.

Can I have the seller carry 15% and the bank carry 80% (with me providing the remaining 5%)? If not what if we changed the loan amounts to 30%, 65%, and 5%?

I am open to suggestions. Thanks in advance for the help.

Can I have the seller carry 15% and the bank carry 80% (with me providing the remaining 5%)? If not what if we changed the loan amounts to 30%, 65%, and 5%?

I am open to suggestions. Thanks in advance for the help.

Daniel Cisneros · Answer

Ryan, thanks a lot for responding , same here I'm having a hard time banks willing to lend if the money doesn't come from my account but I will keep trying and I'll shall see!

Great info and on the dot regarding the seller financing the personal property and the rest conventional as the property im trying to buy is a fourplex sitting on one acre and it also has a mobile home on the side which the lenders don't want part of it, so this will perfectly apply for this scenario. Thanks a lot for your great valuable info!!

Jerry W. · Answer

@Ryan L., I have two properties I have done this way.  In my case the houses were way too expensive for me to buy any other way.  The owner took a 2nd mortgage for 20%.  I told the bank up front and got their approval, then on one I pay 200$ a month on the 2nd, with a balloon in 5 years, on the other one pay interest only for 5 years balloon.  I use a 15 year amortization so at the end of 5 years I owe 60% of the original purchase price and I can then refinance for 80% of purchase and pay off the 2nd mortgage.  The drawback is that it takes 20 years to pay off the property this way, and cash flow is not too great.  Both were $100K or higher houses that I did not have 20% to put down and had been on the market a long time.  They are the easiest to rent of all of my houses but have a negative cash flow.  They are at least B+ in my town.   Just be sure you have a plan ready for the 5 year balloon.  On the first one the guy never cleaned out the garage so I charged him $50 a month for a few years then offered him a payout in exchange for a payoff deduction.  I plan to try the same on the next one but it involves more money and I am very slow in getting enough saved up to stand a chance to get them to bite.  When I get some saved up I try to buy another house hehe.

Daniel Cisneros · Answer

Great story!!, I'm looking forward to come across some people with similar situations so I can also help and at the same time reap the rewards of real estate.

You know, I've question myself if I would get into a deal like yours in regards of minimum cash flow but as your experience tells it is a win win as after a while your already cash flow better and have the equity if you were to sell, you are teaching me that patience is an important key, Thank you Jerry!

Jerry W. · Answer

@Daniel Cisneros, I did another deal like this about a year after this post.  I bought a beautiful massive 4 plex.  Long story short while waiting in line I talked to a guy who ju8st inherited his dads 4 plex.  He along with 2 siblings were losing money each month and it had no mortgage!  I eventually bought it with them financing $45K at 4% interest, with monthly interest only payments of $150 per month with a 5 year balloon.  The bank carried the rest and they got a nice big cash payment for the rest up front.  I calculated the cash return exactly as I would any other house, but included the interest only payments.  At the last minute I got cold feet and did a 20 year mortgage, not a 15, so I had to make a backup plan to pay the $45K as the mortgage would not be small enough to pay off with a refi if there was no increase in value.  I paid that note off this year and actually lowered the payment as I got a 30 year loan at 4.25%.  I have actually never had a 30 year loan on a property, it is disconcerting.  Anyway, the property only had marginal cash flow, but I literally got it for only a few hundred bucks out of pocket.  Other than a new roof that was 50 squares it has been very low maintenance, so while cash low is low, cash on cash looks impressive.  Even at only $75 per month after expenses, it has vacancy, cap ex, and repair expenses included.  At the end of 5 years cash flow is now up $200 per month and appreciation almost $100K.  It has probably appreciated more than any other property.  My experience is that nicer properties cash flow much less, but appreciate more.  It is a balancing act to add a few of those in.  I try to do at least one every year or 2 if I can afford it.

Ryan Landis · Answer

@Daniel Cisneros unfortunately nothing sexy to share lol. Everything I have done since that post has either been true seller financing where they are pretty flexible where I get the down payment from, or bank/conventional/hard money. I have yet to find a source that allows for a higher combined LTV with the seller carrying a 2nd where the rate/terms actually make sense to take that on. I am sure there are some commercial outlets that allow it for some of the higher price points, but at least in the sub <$1M range I have not found a ton of luck. I will say there is a way where you can do some stuff with personal property depending on what you are purchasing. For example, if the real and personal property combined is worth $1M, you might be able to purchase the real conventionally at $800K and have the seller carry 100% of the personal property. Just one thing I have learned throughout all of this :)

Daniel Cisneros · Answer

@Ryan Landis how did you end up structuring your deal. I'm in the same situation where I'm looking to have the seller financing the down payment so I don't come up with anything or minimum out of pocket. How did you calculate your cash flow? any input would be greatly appreciated!

Ryan Landis · Answer

Thank you all for your input - I really appreciate it. I reached out to the mortgage broker I used in the past just to check to see if they have any products that they might be able to use for something like this (they had personally used it in a commercial structure but never in SFR).

I will try to reach out to some local lenders. Honestly, I am really thankful that each of you took the time to respond. I will keep you posted on what I hear.

Best,

Ryan

Neil Aggarwal · Answer

Private money may also be open to the seller carrying a second lien.  They are likely higher interest than a bank loan, but may be viable if need to keep your capital free for another deal.

Derek Dombeck · Answer

Ryan,

All of your thoughts are possible. You really need to talk with your lender to see what they will allow. If the lender wants to sell your loan on the secondary market, they will be less likely to allow the seller carryback. If you have some smaller regional banks or credit unions that keep some of their loans in house, also known as a portfolio lender, you will have a better chance of getting the loan.

Happy Investing

Derek Dombeck

Conventional Loan with Seller Carrying a 2nd?

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