Possible to have a seller financed deal combined with a loan?

Question

Aloha BP!

If an owner was willing to seller-finance more than 30% of the property's value, would a lender be willing to loan me the remainder of the deal?

For example:

Property worth : $320k

Seller-finance : $120k

Loan : $200k

The plan would be to bring the property up to par as tenants' leases expire so that I can increase the rents, refinance, and pay back the seller's portion of the deal. Does this happen in the real estate world?

Account Closed · Answer

very common the owner gives you a second loan behind the lenders first

Tom S. · Answer

@Justin Young You'd have to speak to your lender on what they would use.  I own a 5 unit and even for that, they weight the comparable sales approach more than income approach.  But that might just be my lender and/or the market here.

- Tom

Justin Young · Answer

@Tom S. What if its a small apartment and between tenant turnover I'm able to rehab the units to increase the rent to match the market, the refinance would be based off the increased NOI and market cap rate?

Tom S. · Answer

@Justin Young  That's correct that you have two separate loans and two separate payments.  But you are 100% financed, so the risk is that if you have to sell immediately for some reason, you would have to bring cash to the table to sell (because of closing costs).  To throw some numbers on it:

Property $100k

1st position lender (bank) = $70k

2nd position lender (seller) = $37.5k

You walk with say $4k, after $3.5k in closing costs.

Sell = $100k less 6% commission, less $3k closing costs = $91k net.  $91k proceeds + 4k cash less 107.5k loans = $12.5k cash needed to sell.

To refinance , it's worse because they'll probably lend you $75k on that $100k house, but you owe $107.5k.

For the above reasons, the bank (lender 1) probably won't allow this, unless you have substantial cash or assets.

As others mentioned, a 10% down from you, 10% from the seller and 80% from the bank is much more likely.

Justin Young · Answer

@Tom S.Lets say the seller is willing to carry back about 37.5% of the value. Then I find an underwriter to loan me 70% LTV, giving me a 7.5% spread between the initial non-seller financed portion and new loan. I would still have some reserves for what ifs and I wouldn't be 100% financed right? I would just have two separate entities that I'm making monthly payments to (seller and lender). Please correct me if I'm totally off.

Tom S. · Answer

@Justin Young  In general this won't be allowed to use seller financing as part or all of the downpayment for conventional financing. As Dan mentioned in the post above, it's possible with commercial financing.

IMO, be careful with your above comment to use a combination of sources to fund, and then refinance. If you're borrowing about 100% to finance, you have almost no equity.  A typically refinance for investment property is 75% LTV, so a refinance isn't going to get you any money. In fact, you have to bring money to the table to refinance.

Hope that helps,

- Tom

Daniel Dietz · Answer

Our commercial portfolio normally looks to have no more than 80% LTV for their part. The remaining 20% that we need to come up with can be 10% our funds and 10% seller finance or private funds. Either of those would obviously be in the second position.

Our lender has said that they would let our portion be lower if the seller was willing to do a larger portion of seller financing. He qualified that with "the lower your (meaning me) skin in the game that you want to put in the stronger your numbers will need to be to make sure it is a very solid deal."

An example might be 60% bank, 5% me and 35% seller finance. One seller I was talking too was willing to carry 70% and we could have done 25% through the bank and 5% us - in that case his selling price was just a bit too high to make the numbers work. His goal was to get enough to pay his capital gains taxes from the bank and then make a nice return on the remaining equity instead of putting his funds in CDs (he was retirement age and then some)

Dan Dietz

Justin Young · Answer

@Alex Day I was thinking of crowdfunding the remaining portion that the seller wouldn't finance, then let it season per the lender's requirements so that I can refinance out of the deal to pay back the crowdfunding.

Alex D. · Answer

@Justin Young May work on the crowdfunding. Most crowdfunding sites don't allow real estate investing. It's mostly for debt consolidation, vacation, etc. I think the only issue you'll run into based off of my very little experience, is having your money shown as "seasoned" by your lender. If that is what you were asking in regards to using the whole amount (your cash plus the crowdfunding money) for a downpayment. If it is, most lenders don't like to see money pop up and typically check the last two months statements.

Justin Young · Answer

Just trying to keep thinking outside of the box but would crowdfunding work to come up with the remaining portion as well?