Would commercial lender like this deal? - Posted by Gary in Texas

Posted by Michael Morrongiello on March 20, 2001 at 12:06:01:

A Seller financed note will be discounted to a cash payout amount if the seller wants to create immediate liquidity for thier note.
Generally, with a note set up and “tweaked” to optimize its repayment terms, discounts can be mitigated and kept to around the 10% +/- range.Often they are around 5% if there is sufficient give and take amongst the buyer and seller.

The amount of the discount or said another way the actual CASH payout for the note will depend on the interaction of following variables and how they size up with regards to the transaction:

  1. Condition and location of property
  2. Cash being put down by buyer
  3. Financials on the income and expenses surrouding the property
  4. Current rent rolls
  5. Buyers overall credit profile
  6. Buyers current credit scores
  7. Buyers employment, income, stability on their jobs, etc.
  8. The starting LTV- Loan to value for the 1st lien seller financed note (the lower the exposure the better)
  9. The repayment terms, amortization period, note interest rate, balloon or no balloon, etc. for the note instrument

Clearly, this method of structuring the financing to work in conjunction with the seller’s willingness to carry back some of their equity is a wonderful way to provide a significant LUMP SUM cash payout to the seller even though they are being asked to finance you as the buyer.

To cover more specifics, lets talk …

To your success,
Michael Morrongiello

Would commercial lender like this deal? - Posted by Gary in Texas

Posted by Gary in Texas on March 19, 2001 at 17:51:45:

My real estate agent says lenders want 25% down for this 8-plex I’m looking at. However, the seller is willing to carry back a 2nd in the amount of 15%, so I can get into it for 10% down. Do you know of any lenders out there who would take that deal? The debt coverage ratio will be 1.10 for the whole thing and 1.28 for the lender portion.


Re: Would commercial lender like this deal? - Posted by Paul Macdonald

Posted by Paul Macdonald on March 20, 2001 at 08:27:03:

Oh smoke. Tell your real estate agent to find new lenders. Sure they’d like 25% down but with good cash flow and buyer credit you can go 20% down in your sleep. Turn over a couple of rocks and you can get 80/10/10.

Your biggest problem will be the debt service ratio. For these types of properties they’ll generally want at least a 1.2 to 1.3. Seperating the lender portion and the “whole thing” means nothing because they do not want to take back the property. They only want the money. If you gave the lender a 2.0 DSR but the “whole thing” a .012 DSR and what they’d be doing is buying the darn thing with the added expense of foreclosing on you.

Get your seller to do long term, low dollar payments so your DSR goes up and with 10 to 20% down you should be fine.

I like this deal with a slight twist… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on March 19, 2001 at 21:23:28:

IT sounds like your seller is willing to be flexible and may be somewhat motivated.

Why not consider asking him to carry back (2) two notes and mortgages. A 75% LTV 1st lien that can be structure to be sold by the seller and converted into immediate CASH, and also the 15% 2nd lien that he will retain.

To your success,
Michael Morrongiello

Re: I like this deal …Note Discount? - Posted by SteveCO

Posted by SteveCO on March 20, 2001 at 07:03:06:

Interesting. I’m wondering what kind of discount would apply when selling the note?