Seller-financed down payment and Loan for the balance

[Christian Rivas Plata]

Hello everyone!

My partner and I are looking into purchasing a multifamily building (6 unit) in Hartford, CT and trying to come up with some creative ways to put the least amount out of pocket into this deal and still make it a win-win for the seller and us.

One of the things we are exploring is having the seller finance the down payment (20-25%), but not sure how to go about it as I have been told that lenders would not allow the seller to put the down payment (a 20% mtg to the seller and 80% mtg to the lender... essentially us not putting any money or "skin in the game"). But i cant imagine this hasn't been done before.

Has anyone tried/done this before? How did you go about doing it? Or am i approaching this totally wrong and unrealistically?

Thank you in advance for you responses!

[Don Konipol]

@Christian Rivas Plata.

Conventional and institutional lenders require usually a minimum of 20%, often more, as a down payment for the purchase of investment property. This down payment needs to come from the principals funds, and not from third parties, or worse, the seller.

Years ago a lot of deals were done using “creative “ accounting so it appeared that the borrower was coming up with the down stroke while it was actually the borrower; contracts were written for prices higher than the actual selling price; money was transferred from sellers account to jointly owned “escrow “ accounts; sales were set up to “land trusts”, zero coupon bonds purchased for 10c on the dollar were recorded at full face value when use as a down payment, etc.

Lenders started cracking down on these practices about 15 years ago. Since, the AG offices have gotten heavily involved in prosecuting mortgage fraud. Every borrower now must sign a statement at closing that the purchase price is as it appears, the funds for the down payment are his own, there is no side agreement or funds paid out of closing, etc. This has eliminated almost all these types of “nothing down” deals.

So, is it possible to still do a “nothing down deal, legally”. Yes, but quite difficult. The borrower can agree to provide 100% financing if (1) he owns the property free and clear or (2) he is willing to “wrap” the existing mortgage into a new, and usually larger mortgage note and let the buyer sign this new note without putting up a down payment.

For the seller to do this, he must usually be pretty motivated. And this often means he’s trying or can only sell the property for more than it’s worth as a cash sale. Otherwise, he would just sell it to someone who could either pay all cash or could put down the 20% to obtain a loan.

Prior to 2009 there were hard money lenders would would finance deals where the borrower had none of his own money invested. I don’t know of any operating this way anymore. We will sometimes accept other real property collateral as additional collateral so the borrower has nothing out of pocket, but obviously this is just a simpler version of the borrower getting a loan on property he already owns and using the proceeds as a down payment on a new purchase.

We continue to see a variety of techniques, sleight of hands, and outright fabrications as would be property owners try to slip a “no down” deal through the cracks. We, like most hard money lenders, have become very adept at identifying these attempts, and I know of very few that get financed.