Purchase Money Mortgage for Construction Loan

[Matthew Harper]

Hi all,

I have been speaking with the inheritor of a home in a high end neighborhood in Birmingham, Alabama (more specifically, Mountain Brook).  The home is in a prime location, but is beyond the scope of repair for what would be desired in the area.  It makes the most sense to tear down and rebuild.

I am new to investing, so my resources are fairly thin.  I have been working with a partner for this deal who has built homes in the area before.  Our initial idea was to suggest a purchase money mortgage in which we use seller financing as a down payment on a construction loan.  The seller is open and excited about the ideas we have discussed but is a bit worried about being subordinate to the construction loan.

Since I have not done this before, what assurances can be made to the seller and what collateral would he have in this situation that would make him feel more at ease?

Are there other options that I may not be aware of that would facilitate a large, new construction project in a case like this?

Thanks,

[Will Barnard]

Sub2 only comes into play if the seller had a mortgage.

How many square feet is the existing home? How many square feet do you expect to build if you tear down?

Based on numbers given, you are slightly over what I would consider a deal based on the higher cost you put for construction and an exit of $1.25M.

The seller being concerned with a second position is valid so to overcome that, you must show that the combined LTV (loan to value) is safe and that the exit price is easily obtained in your market and not a best case scenario.

Bring in a JV partner who can fund the whole thing would be another option and take the seller out completely.