All Forum Posts by: Michael Opdyke

Originally posted by @Mike Carr:

There are people financing big apartments 100% and paying them off in 8-12 years. They typically go over asking price to make it worthwhile for the seller. I would forget the banks completely if that is your strategy. if you have to bring money in, im sure it wont be hard finding people to put up money for a good solid deal. If they are only putting up 5% im sure you can structure it so its a win win and still keep a lot of the equity. 

Thanks Mike for the response. I'm pushing for 100% seller carrryback financing and part of my strategy is to agree to a prepayment lockout for 10+ years to secure the seller long term interest on top of the principal, increasing their return and deferring capital gains. If the seller wanted 5% down, if I brought in investors, I'm finding it hard to find a bank that would come in with a 2nd mortgage to pay out the investors early, since banks don't want to be in a second position behind a seller carryback. If I find investors willing to keep money in the deal 10+ years, I'll have to give up a good chunk of equity or a preferred return relative to the amount of downpayment required. I'm all about creating win-win deals and using a team to succeed, but also want to see what other options are out there.

If bank financing doesn't work I might just try to partner with the property management firm.

I am marketing to owners of free and clear apartment buildings and showing them the benefits of Seller Carryback Financing. Assuming the seller only requires a 5-10% downpayment, I've been thinking of using a bank loan instead of pooling investors for equity. I know that typical bank/seller financed transactions are 75% Bank/15% Seller/10% Equity , but what about turning this upside down at an even higher leverage of 90% Seller/10% Bank?

The bank would demand first position so the Seller would have to be OK with being in second, but not being able to pay off such a low payment to a bank would be nearly impossible, so the risk of default is to the second position seller's note (as with everyone else I would avoid default at all cost). If I can't pay the seller's second position note, they could take the property back (same recourse as if it was a 100% seller financed transaction), but would be on the line to pay the bank's first position note with cashflow.

Since the bank is at such a low LTV, I would think they would be open to even funding capex, so on a property with a good amount of deferred maintenance and potential for unit upgrades, let's say they loan at 25% LTV to cover all these costs

Now, I know I will be warned about using so much leverage, but if I can keep the total DSCR over 1.4 I would feel safe. The way I could make this work is a 3 years I/O from the Seller, and make sure I am buying a property with undermarket rents and ability to force additional appreciation. I would ensure that I could conservatively underwrite a 1.4 DSCR in 3 years based on bringing rents up to market without even considering additional rent increases from upgraded units. If this sounds crazy, I believe I found a decent sized property that fits this bill but want to secure my plan for coming up with the downpayment. I've also considered using investors but I could pay less of a return to the bank AND keep all the equity, especially for only a 5% down payment.

Please let me know if you think a bank would be willing to loan at 25% LTV, and what objections a seller would have.

Originally posted by @Gail Greenberg:

And further, I'll share something I learned last weekend at Pete Fortunato's seminar in Tampa. If this guy never wants a lump sum, you could refinance this property and take the money and go buy something else - in essence, put the mortgage you owe this gentleman onto another property.  See what I mean?

Of course, you would "move" the mortgage only after he agrees to it. But a note is "currency" and you can spend it in a lot of ways.

Hi Gail - Could you expand on this further? This is very interesting for my seller financing strategy I plan on deploying and could be of benefit to the OP (My strategy is to buy free and clear properties with 100% seller financing with prepayment lockout for 15-20 years with a market interest rate). I thought the best I could do was take out a line of credit during the lockout period in order to access equity, but a cashout refi would be even better. If I understand you correctly:

1. Buy Property A with seller financing. Seller holds a note secured by a mortgage on Property A

2. Build Equity on Property A

3a. Refinance Property A and instead of paying off the Seller's note, use for down payment on new Property B

3b. Seller would of had to of agreed to transfer mortgage from first position on Property A to second position on Property B (if Property B is worth more than Property A and additional bank debt is used to fund difference of Property B and refi funds)

4. Seller is still paid the same principal and interest he would have received if Property A was not refinanced.

Is this correct? Also, is this something that can be negotiated with the seller say in the fifth year of owning Property A or would there have to be certain language in the original mortgage?

Thanks!

I apologize for no paragraphs, I wrote it on my phone and it took away my spacing.

This thread is very interesting and I just wanted to jump in since I am formulating a strategy to buy fully depreciated free and clear properties from retiring landlords and thought the OP could use this as well. Formulating a marketing message for these owners that addresses capital gains and depreciation recapture was the trickiest part. From my elementary knowledge of tax law I found that the IRS can determine a MLO to be an installment sale if the terms look like an installment sale, aka there is a large down payment and combination of the lease and option equal the fair market value. A true MLO won't kick off capital gains nor depreciation recapture since it is not a sale. My strategy currently is to use a minimal down MLO where I pay all MLO closing costs and make the term of the MLO enough to cover depreciation recapture plus a bit extra (3-5 years) Then the option would be a Seller-carry deal that is 100% financed except closing costs. This means that the seller would be getting lease payments from me during the MLO in addition to a full priced interest bearing mortgage that they would be able to defer capital gains on. The key for this offer is is that I will be including long prepayment penalty terms for 10+ years so the seller can continue to benefit from deferring capital gains. I know this is not ideal from my end but this is being marketed as a retirement option and I am trying to differentiate myself from the normal investor. I'm not sure if the OP would be interested in this strategy but I wouldn't mind some input from experienced investors.

To follow up on this post, I recently realized that using Seller Carry-Back financing (seller holds a mortgage lien) as opposed Installment Payment financing (more commonly known as land contract and contract for deed) that both methods benefit the seller the same with regards to treating income as an installment sale (defers capital gains over the term of the loan), but with Seller Carry-Back financing legal title transfers at closing just like a bank loan. So getting a line of credit on a property with a first lien position as a Seller Carry-Back note should not be a problem. 

As a buyer, IMO it would make no sense to offer to purchase a property with a land contract if the seller is willing to do a Seller Carry-Back.

Here is a good site that explains the difference:

http://conservationtools.org/guides/26-installment...

Thanks for the responses. I contacted a couple more banks but no luck. I will be continuing to contact more banks. Below is an article that gave me hope this was possible. It was for a residential line of credit rather than a commercial line of credit though.

https://budgeting.thenest.com/can-home-improvement...

I am trying to figure out if it is possible to get a commercial line of credit on an apartment building that is purchased through a 100% seller financed installment sale. I know that as the buyer it would be in my best interest to refinance out, but if you had a deal with the seller to maintain the installment sale payments for 10+ years in order to provide capital gains savings and interest on the loan, it would be great to be able to access the built up equity (or even forced appreciation) to cover capital expenditures in the subject property at the very least, maybe even use the equity for other acquisitions.

I've done a good bit of research on this and understand that an installment sale provides the buyer with equitable title, but legal title remains with the seller until the last installment payment is made. I've talked to one portfolio lender and they have never heard of such a loan. If the contract was written creative enough, I would think that a bank would offer a line of credit if the lone variable of the seller having legal title was accounted for.

This is my first BP post after doing a lot of lurking so I look forward to the responses. Thanks!