Getting a bank loan and owner financing at same time?

Question

Hi BP,

First time investor potentially closing in on his first deal. I am currently in negotiation with a seller to buy two duplexes here in South Florida.

To give you some background information the seller is an elderly retiree and is looking to sell these two properties that he personally had built back in 2004.

I believe the properties are worth 300K each for a total of 600K and we have agreed on a purchase price of 560K so not a huge score for me there price wise. What I did get him to compromise on was the financing. In agreeing to his price he has agreed to potentially owner finance the house to me.

I have investigated how I should go about the financing and it is here that I am not quite sure. He currently owes 340K total on the two properties which gives him 43% equity assuming the duplexes appraise for 600K. I want to get a mortgage for the balance he owes on the two properties which would be the 340K and then owner finance the remaining 220K that he would be due to receive which would be the portion of the sale proceeds exceeding the mortgage payoff.

The advantage to him is that he gets the price he wants and the advantage to me is that I get into the properties with little to no money down seeing as how I won't be needing any down payment to get a bank loan when the LTV is 56% and then I can structure a very low interest rate with him personally for the remaining balance to pay off over 3-5 years with perhaps a ballon payment at the end of the term.

Does anyone have an experience with getting a mortgage for a property and then also paying a note to the owner as well? Can this be done? Please feel free to critique or poke holes in my ideas as I am still learning and would greatly appreciate the input.

Thanks

Jason

Andrew Postell · Answer

@Jason Brown what you are describing is called a "wrap" mortgage. The owner's new mortgage wraps around the old mortgage. The old mortgage stays in place. You actually do nothing here. You would likely make your payments to the current owner, he would then continue to make his normal payments to his mortgage, and everything will continue on. The risk that you face is that if the seller stops paying his mortgage, the bank can foreclose on your home. If you can struture it where you pay his mortgage for him, then pay him the difference to his "wrap" mortgage, then you are better protected. However, if you stop paying his mortgage then you will ruin his credit. So you both have a risk with this deal with the mortgage being in place with a wrap on top. What you are describing is performed by many investors. Hope this helps.

Tom Gimer · Answer

Your seller presumably expects his $340k mortgage(s) to be paid off at settlement -- and he rightfully should. Your new lender will also expect to be in first lien position. That would put your seller financing in second position. Is your new lender going to agree to $220k in subordinate financing? Doubt it! And since they are sensible lenders, they're not getting involved in this deal with wrap-around on the existing first.

So I agree with @Tim Swierczek -- get as much money from your bank as you can to acquire the property with the max seller 2nd they will allow.

Sasha Mohammed · Answer

you will have a difficult time finding a lender that is willing to finance the differential and fall in 2nd lien position. it's not to say it's impossible, but you would more than likely be looking at private money or possibly hard money for this. most financial institutions are not going to be ok with falling in 2nd lien position, especially with the current lien being in someone else's name (see above comment about risk of foreclosure due to seller not making his payments as agreed).

Sellers often have a difficult time when it comes time for you to pay them off in-full as well, because they'll run into a capital-gains issues. I've seen seller-financing agreements show up with lock-outs (which i'm not sure are legal in every state, but they still do it) -- meaning you can't pay them off at all within the first 5 years (as an example). If you decide to move forward as you have described, i would have an exit strategy in-place and make sure to consult with an attorney to make sure your interests are protected.

Tom S. · Answer

@Jason Brown Jason - were you able to successfully close on this deal?

Jesse Liu · Answer

This seems to be a dream scenario. No conventional banks would ever allow maximum seller financing at 25%. I'm running into this exact situation where the seller is willing finance all $275k of the down payment at market rate but no banks would lend the other 75%, at least no conventional banks.

Jason Brown · Answer

@Andrew Postell @Tim Swierczek @Tom Gimer

Thanks guys! Your input was extremely helpful.

Now on to secure financing.

Getting a bank loan and owner financing at same time?

Getting a bank loan and owner financing at same time?

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