Private1st leinholder willing to subordinate. Can I use that as downpayment?

Question

Previous owner sold empty 40 unit apartment for $700,000  and gave 100% financing to the new owner.
New owner renovated and filled the building. New owner died and his estate is anxious to sell.
According to the Realtor, the previous owner wanted the income stream from monthly mortgage payments and would want some of the lien payed off from a sale, but would be willing to subordinate some of his lien to a new first mortgage.
Original lien was $700,000.
Assume $1,000,000 purchase price so that the math is easy.
Assuming the private lien holder is willing, how can I use his equity as my down payment?
Could he split the lien into two liens- one for $250,000 and one for $500,000 (less what has been paid off over the past 3 years)

Using the $250,000 second lien, could I take over that loan and get a  first mortgage for $750,000 to pay the $500,000 lien and the remainder to the estate?

Lenders will want skin in the game. Can I partner or Joint venture with the old owner/lien holder using their equity when applying for a new mortgage with an agreement to buy them out after financing has been obtained?

Any 100% financing options that will work using a lien holder willing to subordinate?

Lester Schmitt

Bill Gulley · Answer

Hi this reminds me of a motel deal I did. Looks to me like the previous owner (note holder) is willing to do almost anything to keep his income. so he's motivated. The estate wants 300K we'll say. You do an LLC with the note holder and put a first on the place for 300K, 400K if he wants some cash and payoff the estate. Now, in the operating agreement, you take the management of the LLC and an option to buy out his interest. You finance this buy out in the company from earnings you have for management. Also, don't know how old the note holder is, but put a key man life policy on him, term, sufficient to pay him off for the buy out or you will be in business with his wife and/or kids! 
                    
                    This way, you and the note holder have signed for the loan in an LLC for 300/400K, probably get that on collateral alone without a personal guarantee. You, in essence have 100% financing. Your management fee is the income derived from operations to a point, and you may allow him some passive income, say for three years, then he moves out with a note. You'll need to check on financing and due diligence, run the numbers.
                    
Also, you can use one promissory note with different parts of principal (like mini notes inside of one) with only one security agreement. Each principal part can be amortized any way you like, have a balloon payment on one part, defer interest on another part, make each part payable to different beneficiaries, you can make this dance!If you need assistnace in designing this drop me a line, I'm bored! Bill

Bill Gulley · Answer

Hi, both you and the holder are thinking in conventional lending terms, understandably he wants to see skin in the game, say you get a 400K loan and he subordinates, which he is willing to do. In the evnt of your default, he has to come up with 400K, go through foreclosure to obtain the property.

What are you trying to accomplish here? You want eventual ownership of the apartments. The holder wants a long term income and some cash in his pocket and out of the landlord business, is there anything else?

If you follow the proposal above, the holder and you form the LLC in a partnership. The LLC borrows the 400K on a non-recourse basis, you wanted to show the abount of the holder's interest as equity in the purchase from the estate, right, well there it is. At closing, the LLC assumes the existing debt from the holder, he is in partnership in the LLC, that's his money, so as far as the lendder is concerned, it's equity in the deal.
Now, in the Operating Agreement, you and the holder agree that you are personally liable for the $400 K (could be any amount) in the buy out agreement. Now, in the event of default of your management, say occupancy falls to 60% of gross income is 70% of total debt service, what ever you agree as a trigger, where is the holder at? He is in the LLC, he simply moves into management, no cash required except to make a payment which he has you on the hook for, perhaps you could provide additional collateral to sweaten that part for him. He has no foreclosure. He could then market the membership in his LLC to the next guy anyway he likes. He is in a much better position as a partner, in a passive position, than being a note holder! The LLC has a new basis too, which can be assigned within the LLC anyway you like, say giving it to him until you reach your "skin in the game" threshold. 
This deal is big enough to seek legal assistance with this concept. An attorney will probably tell him that he is much better off in the LLC, because he is!  His interest can be held in trust as well or assigned.
Where are you at? You move into a limited ownership position, but it could be 50/50 with a buyout. In essence, you have 100% financing. You have control of operations. Your balance sheet improves with your ownership interest, no personal debt and a contingent liablity for your personal guarantee for the buyout amount or whatever you agree to, could be the whole thing).
What you are doing is wraping the existing financing in a new purchase and you finance your purchase, not in a real estate transaction, but under terms of the Operating Agreement of the LLC.

If the holder were willing to subordinate, he should be willing to go for this, it's a win-win for both of you.

Now, if the holder is senile or just can't grasp what's in his best interest and he won't listen to his attorney, then;
If you qualify for a 400K loan payment with income from the property, you should have no problem obtaining a first mortgage on a 1M sale/appraisal. You could also sweaten the deal with your lender with additional collateral as well. Now, you're thinking, well that was my original desire. The difference for you is your personal liabilty for 1M, risking additional collateral pledged for the deal and limiting your ability to leverage the next deal under conventional terms.

Pick a plan, pick an obligation, lol

Hope this gives you some ideas! Bill

Bill Gulley · Answer

Hi, failed to mention that your second option may require a HM/private lender.

Lester Schmitt · Answer

Very informative and helpful information.
What if the deal needed me to borrow enough to pay the estate $300,000 and the lien holder partnering with me wanted $400,000 in cash, then holding a $300,000 note. 
What do I show to the new 1st lender prior to-or at closing to show what skin I have in the game (instrument such as a letter, a promissory note).

Private1st leinholder willing to subordinate. Can I use that as downpayment?

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