Owner financing - pay structure?

Question

Typically what kind of terms do the owners expect if they were to lend you a % of the building?

Ex. Lets say I find a 1,000,000 apartment building. Bank will loan 800k and I need 200k for the downpayment.

If the owner is willing to give me 200k in financing how does it work? Is it like having a second motrgage? I'd pay 7% fixed, 25 yr ammo....etc. With the ability to pay him the remainder of the balance at the time of sale(When I sell).

Do they want a much higher rate then 7%?
Do they want it paid back within a year or two?
Does the mortagage to the bank take precendent over the owner financing if you come on hard times?
Do they get a piece of the pie when you sell?

Whats the standard? I know that every deal is different but I would like to know generally where these shake out? I don't want to sound like a fool proposing terms that are way off nor do I want to be taken through the cleaners by the owner and pay through the nose.

Thanks!

Jon Holdman · Answer

Lenders very much do care where the down payment comes from.  Commercial loans often have a "CLTV" or combined LTV limit.  A lender might be willing to do something like a 80/10/10 loan where they fund 80%, the seller funds 10%, and the buyer puts in 10%.  Residential lenders often want to see multiple months of bank statements, and expect to see the money in there for all the statements.  They don't like it when money just appears at the last second.

Now, if you can find an investor who will give you the money three months ahead of time, you'll be OK.  Or, if you have the money to get the loan, then get a second mortgage to replenish your cash or give you more working capital, that might work, too.

And of course, you should speak with actual lenders.  Things are in a lot of flux right now, and I've not discussed this with my broker for several months.

Dave Kennedy · Answer

Makes sense...thanks guys....

I figured it depends on the terms. But typically the rates/terms would probably fall in between national lenders and hard money lenders?

At least thats what it sounds like.

Jon - I understand you need to have a little skin in the game. I've read a few books then talk about getting angel investors or owner financing to fun the "down payment". You saying its highly unlikely that you can even do this? I would think that as long as the lender is getting that 20%+ down payment they wouldn't care where the money was coming from.

My "skin" in the game would be closing costs, appraisal, inspection...etc. Granted its obviously a small number compared to what it would need to take to pay a down payment. But I simply wouldn't have enough money to even make an impact.

Is it not possible these days with the credit market being what it is?

Eric Wang · Answer

This is my understanding from talking to people on Biggerpockets.
Term is most likely short-term, as owner would not want to do 25yr term.  At the end of your term, you would have to refi.  Here is where there can be problems.  If you still owe a balance to the owner, you would have to paidoff the balance, or re-work the contract with the owner.   If your property drop in value.  That would mean more money out of your pocket to refi.  Using your example, if your property is now worth 900K and you still owe 100K to the owner.  In order for you to refi at 80/20, it would cost your 180K out of pocket.  Now if your property is worth 1.1M, you wouldn't have any problems.  But we can't assume anything.

Jon Holdman · Answer

The details of the terms are up to you and the owner, so pretty much everything you bring up is up to the two of you.

The bank will want to be in first position.  The owner, in this case, would be in second position.

From what I hear, its unlikely a bank would be willing to give you $800K if the owner was giving you $200K and the price was a million.  They would want you to have some skin in the game.  That said, I've heard of tricks where the price is increased so your cash is reduced.

I'd ask the owner what terms they want rather than proposing something.

The one time I did owner financing, the owner was in first position, no second.  The rate was about market rates, 15 year fully amortized term.  This was a house.