Subject To Question - How to Pay for Difference in Purchase Price

[Matt C.]

I have searched on the forums and couldn't quite find the answer to my question.

I am looking at property where the seller is open to the idea of a sub 2.

Here are the numbers:

ARV - $600k

Loan Balance - $300k

Price - $450k

My question is: If the seller is willing to let me take over payments on the $300k loan what are my options for paying the $150k still owed to the seller? 

[Logan Drew]

Will the seller carry until you sell the property?

[Matt C.]

@Logan Drew unfortunately not. the proceeds will be used to fund a replacement home.

[Logan Drew]

Hmmmm... how's your track record? Do you have a list of recent, successful projects over the last 24 mos? I have seen these get done with a JV or on a very strong ARV appraisal if you have a well outlined, line item pro forma construction budget and very good credentials. Is there any chance you can get plans and permits during your contract period? You can usually get 65%-70% of the $600k ARV if you have all of your ducks in a row. Can you locate the $30,000-$60,000 to close the gap? I'll message you if you want to talk in more detail.

[George Krajacic]

Below is the answer I provided for the question posted on east coast. The question was little different but the answer does applies to your situation.

“Apparently hard money lending is a little different in California. There are very few HMLs that would provide 100% loans. If they do they will have some very stringent conditions to the loan. To start with lender would require upfront payments for the following:

1. all the points,

2. 6 month of interest

3. Closing costs

Additionally lender would require at least 30% of net profit and lender would have a right to take over the project if the borrower does not perform according to mutually agreed schedule. Usually lender would make this type of loan only to very experienced flipper.

Most California HMLs make the loans under following terms:

20% down payment

Interest- 10% to 12%

Points-2 to 4

Terms-6 to 12 months

Monthly interest only payments

Closing cost- 0 to $1,000

In this scenario borrower would keep 100% of profit. Usually this type of loan would be made on the properties where the purchase plus repair cost does not exceeds 80% of ARV.

Almost always, lenders want you to have a skin in the game”.

Matt, in your case, you are buying the property at 75% of ARV but hopefully that will be somewhat offset by the fact that you are going to have $300,000 with low interest. Also if refurbishment cost is more than $30,000 than you are starting to cut in your potential profit and that might jeopardize you being able to get the loan. Additionally this loan will be harder to get because it will be a small loan in the second position. The best solution would be to find the partner with $150,000 and not get a second loan.

I do not know if this helps, but you can call me if you have any other questions.

Good luck,

George

[Bryan Hancock]

We need to know how much money the seller needs to move on to their next residence.  Is that all $150k or is it a smaller amount?

The answer will then be pretty simple.  The seller could carry a second for whatever they don't need or you could structure all sorts of other exotic ways to finance things with the seller for what they don't need today.  

The amount you pay in cash generally would merit a disproportionate reduction in what you're paying for the equity.  Examples:

Seller wants all cash now

-$150k in equity identified in your example

-Offer $75k for the $150k identified - Simple

Seller wants part cash now and will finance part of the equity identified (Your likely scenario)

-$150k in equity identified

-Seller needs $20k to move to next residence

-You could double the $20k they need to say it is worth $40k in equity

-This leaves an offer to pay $130k total for their equity, of which $20k is in cash and $110k the seller finances in some fashion

-This would leave open the discussion of how to finance the remaining $110k.  How this is accomplished will be driven by their wants/needs, what is ethical, and your needs for controlling the project on a go-forward basis.  We'd need to know what your plan is with the property

You could do it thousands of other ways too.  We really need more information to be more helpful.  Note a few other things:

1.  If you don't have the cash to pay the seller you may be able to use private money to finance cash to them

2.  You should disclose due-on-sale risk to the seller

3.  I don't like subject-to financing for long-term holds for risk reasons.  To me it is more suitable for short-term financing

4.  Wraparound mortgages for exits or other lease/option strategies are risky for both you and the seller if you don't have a bucket of cash to correct things if they go sideways or south