Posted by John Behle on May 17, 2000 at 12:58:52:
Most buyers shun “nothing down” type deals. Or “McDonald’s” transactions (you get cash back) on the purchase of a property.
Your LTV is fairly high too. If you are looking at 240 price on a 260 value, that note would be at 92%. I doubt you could find anyone who would touch it under those terms.
Now, it may be possible to create a first and a second, sell the first and have the seller of the property keep the second. The key will be finding someone who would consider that scenario and structuring the right LTV’s.
Getting your seller 240k cash and some for you also is not likely. But, for example, if they were willing to take 200k cash and hold back a note for 40k, then you could do this with the right note buyer and/or lender.
Then a scenario where you create a 220k note, broker it for 205k, give your seller 200 and you keep 5k might be possible. But again, you would need a lender or note buyer willing to go a little over 85% LTV with no qualms about “secondary” financing like the seller carry back, the fact that it is nothing down, and that they are loaning on appraisal not price.
HIGHLY unlikely, but may be possible with a local note buyer or lender. I’ve done deals like that, but they are a challenge to structure and disclosure is important. As long as everyone understands the details and structure and agrees, it is fine.
When you start to play any games with a lender or note buyer as far as hiding the real price or not telling them about the secondary financing, you can enter into the realm of loan fraud.
It can be easier sometimes on a refinance. Some lenders have been open to refinances with no or little seasoning of title. I.E. you buy the property under seller financing and refinance 3-6 months later. Many go higher LTV’s and terms on a refinance. At lower loan to value ratios, they are less concerned about secondary financing - or some will even do a combo loan of a 1st and second themselves.
In a refinance situation, you could get the seller to “Subordinate” a portion of what is due to them, because again 240k cash out of the deal would be un-likely.
The key is knowing lenders, note buyers and what they will do. It’s possible to do deals like that, but can be done improperly resulting in problems (someone claiming fraud, etc.) Fraud is not a problem if there is no form of deception.
But, there are two other issues.
PROFIT? I would vote the deal is too skinny. One, there are better deals - in any market. Two, the risks are too high. There has to be enough profit in a deal to easily re-sell a property or have the cash flow needed to keep it.
ETHICS? First, it’s not easy to get a seller to agree to one of the described scenarios - especially if they see you are walking away with cash. It’s not impossible, but more often than not their question comes down to “then why do we need you?” and they refinance themselves, discount the price for cash or find a better buyer. Only when the deal is too skinny, do they readily accept it.
And then, you have to look at both your and the seller’s position after the sale. If they are in a high LTV junior lien position, that is a risk. If you have a property that is financed to the hilt, that is a risk too - for you and them. Again, there needs to be more of a profit margin.
Sometimes getting into deals can be too easy.
It reminds me of the little dog I had as a kid. I followed him one day all down the fence barking fiercely at the huge dog on the other side. When he got down near the gate and saw it open - with a look of panic in his eyes he looked up at me like - “HURRY - CLOSE THE GATE!”.
The point? Over 20+ years I’ve seen dozens, maybe hundreds of people use creative financing to get into deals and not be able to deal with it once they have it. They crash or bail out and either they or the previous seller get hurt.
If an investor doesn’t have a very sure plan and procedure for the disposition or profitable ownership of the property, then it is called “The greater fool theory”. They just expect someone to come along and bail them out of their marginal or un-profitable deal.
When it doesn’t happen, and they can’t afford to keep the property - pain follows.
So, is the deal profitable enough? Probably not. One sure way to tell if a deal is profitable enough is how easy it is to structure. If the profit is there, there is money available and techniques that will make it fly. That doesn’t mean it may not be an advanced or complicated deal.
If we are struggling to find a way to put a deal together, the first pause and question ought to be “is it profitable enough?” And, if it is, then money or financing usually isn’t a problem.