Do I inform the bank of seller carry back?

Question

Do you tell your lender that you plan on having the seller carry back on deal?

For example, I want to get into a property with a conventional investor loan. I need 25% down, and the loan covers 75%. If I have the seller carry 25% do I need to include the bank in on this part of the lending? Of course the bank will want proof of funds for that 25% down, which I don't have, so do I then tell them about the seller carry back?

Thanks!

Greg Zessin · Answer

I have done those deals. And some banks are still doing them.  Usually smaller local banks.  Make sure you present it to the bank with the sales contract.  In fact, make sure you give the bank other supporting information such as how you plan to improve the property and increase rents.  If you just show say you are getting 100% financing, banks are less likely to loan. Some will still do it, but most won't.  But if you show how you can increase the value quickly, or how you have to put in your own money to fix it, the bank will be more open.  It helps to have some real estate experience when trying to get these loans. My first deal like this, I already had 7 properties I was renting.

Additionally, you don't want to leave a bad taste in the mouth of the bank.  If it gets all the way to closing and then they find out, you are in some trouble. Not only may you lease the funding, you lose future funding too.

Here is how my deals with this type of financing go.  Meet with Mr. Seller to view the property.  Ask Mr. Seller questions like how long he's had the property, why he's selling, what's he doing after he sells.  This will give you clues to whether he can even do a Seller Carry Back.  Let's say he's  had it for 20 years and he's tired of managing.  So, I ask Mr. Seller if I give a X dollars for the property (which is usually close to asking OR is asking price - assuming the numbers work), will you be willing to loan 20%, the remainder will come from the bank and/or me. Mr. Seller agrees. We sign two documents. One is the financing documents. Typically it is a shorter term note.  The second is the sales contract, with the contingency that has approved financing from the seller and from the bank. That way if the seller decides he just wants to sell and not finance, you have a legitimate escape from the deal.  Then you go to Mrs. Banker with all your supporting documents on why this is such a good deal. In a nice binder, I show Mrs. Banker the sales contract, the seller financing contract, pictures of the property, spread sheets showing the cash flow of the property, current tax returns, paystubs, expected repair costs, and a summary of my real estate experience (even if its just being a member of biggerpockets and your local REIA and the 2 books you read this year). Mrs. Banker is impressed with how prepaired you are and the numbers make sense. So she gives you an in house commercial loan.  And you are on your merry way!

Another strategy I use more often (since I buy properties that need work) is to get credits from the seller.  You may not get the whole down payment covered, but you can get a lot depending on the bank. Some banks limit seller credits to 6% of the contract price. Others will allow more.  Usually credits are for major repairs like windows, roof, furnace, flooring.

Hope this helps.  Good luck with your investing!

Matt Devincenzo · Answer

I'll start by saying this is something I'm looking at but have not personally done yet.

When you are talking to the bank looking for a pre approval obviously you'll be asking for a certain loan to value (LTV). The other thing you'll want to ask them about is the Combined LTV (CLTV).

So maybe you find a lender that will lend say 75% LTV. Then when you ask about the CLTV they are willing to do 90% CLTV. So now you will have to fund 10% down and whatever reserve requirements they have, and obviously they are going to be approving your DTI with both their loan and the seller carry back.

These seller carry backs and CLTVs are things that are more common/familiar in commercial lending since often investors are looking to increase their COC return.

I just now looked at the Fannie/Freddie LTV/CLTV guide and they have a max LTV of 95% and a max CLTV of 95%. The value here in getting a seller carry back will be in either keeping the first loan lower to avoid the PMI or in avoiding more stringent underwriting on their higher LTV loans. Your best bet is to try to sit and talk to a mortgage broker or whoever it is that you're trying to get the loan through to understand what specifically they look for in these types of deals.

Jerry W. · Answer

@Steven Johnson , I have done 2 owner carry back deals.  In both I told the lender  what I was doing and had the owner get a 2nd mortgage behind the bank.  The banks in my case did not care as long as they were first.  That being said I had a high income with little personal debt, ie. no car loans, no personal home loans, no credit card etc.  The lending rules have tightened a lot even in the last 2 years since I did the latest one.  Both deals were really marginal but i did them because of no money down.  I figured my property management fee and handyman fee would be ownership in 20 years.  Pretty good wages.  I did both on 15 year notes on the main loan, and a 5 year balloon on the Seller loan.  At the end of 5 years I could refinance and pay off the balloon (with a new 15 year loan) as I was below 60% equity at the end of 5 years.  The seller got 2% on their note.

I would not have been able to buy either house with the 20% down payment in cash.  I added 2 quality houses with little or no cash flow, but my cash on cash return is almost 50% (I did put money in to cover closing costs and mortgage insurance).

Ned Carey · Answer

Generally at settlement or the application process you will have to sign something about where the money comes from and whether there are any side deals the bank should know about.

I am not going to sign anything that can send me to jail for bank fraud.

Account Closed · Answer

The lender might consider the loan if you put up collateral.

Joe Gore

Steven J. · Answer

Thanks for all the responses. I have talked with my lender and because I'm new and don't have enough to show for myself they wouldn't lend if I was using all borrowed money. Lame. I'll try some other lenders to see what might come of it.

Thank you all

Wayne Brooks · Answer

Yes, you have to tell them.  Also, it will be pretty obvious from the HUD statement at closing.

Aaron Junck · Answer

Steven J.  here is what my thoughts are to get around this... Somehow scrape up the downpayment money, bring that to closing, close the deal and then after you close, take out a second with the owner and then you get your funds back ...

The trick here is to be creative on scraping up the funds am having them documented to satisfy the bank. Most want to know where the funds come from if they just magically show up.. If you have family with some funds available you may be able to get funds from them , but the bank will want to see the funds as a gift and not a loan...

Jerry W. · Answer

@Greg Zessin  wow amazingly good post.  Put a picture up please.  I like your style and thoroughness om this.  Way better then the way I did mine.

Jon Holdman · Answer

It may seem "lame" from your perspective, but from the bank's they're taking on much, much more risk by you not having an actual down payment into the deal.   If it goes bad, you just walk with no losses.

And the risk of it going bad is much higher.  You're over leveraged, which means you have to have an exceptionally good deal to actually have any cash flow after all the costs.  Banks use the rule of thumb that

net rental income = (75% * rent) - PITI

In this case, PITI includes both payments.  I use the rule:

cash flow = (rent * 50%) - debt service

Now, that 50% value can be increased if you self manage.  But you are "buying a job" to earn that extra increment.

Further, in some case, the seller carry back is phoney.  That is, you and the seller agree on a price.  Then you write a contract for 1.33 * that price.  You take a seller carry back for the extra 33% (25% of the total) and get a bank loan for the rest.  After closing, the seller forgives the seller carry back and you've managed to get 100% financing from a bank.

Do I inform the bank of seller carry back?

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