OfflineMy dad posed the question to me, "How would we approach a local community bank and ask them if they would fund 80% of the purchase price and allow the seller to finance the 20% down payment?"
My simple answer was give the bank a business plan showing the income to debt and expenses, the cost of what immediate repairs we need to do, that in the area people are buying the homes and fixing them up cause they are sorta historic, that they are going to have secure investment, and also what the projections would be IN CASE thing were to go BAD(oil industry collapses, homes prices are killed by foreclosures, and maybe a couple other scenarios).
All a bank cares about is that they make a profit and that their investment is secure. And we need to show them that.
My dad wants to know everyone's thoughts on how we could approach the bank and get the conversation started on allowing the seller to give us 20% owner financing.
Thanks!
RENinja
"Remember, success is a journey, not a destination.
Have faith in your ability."
Bruce Lee
Realistically, its not that simple, but allow them to answer your first question as fully as possible, and then ask sub-questions to that.
Please keep in mind that they will ask what your finances are because that is more important than any profit that might not exist if you cannot personally afford it.
Use whatever first few banks you contact as testers for your presentation and not ones you expect to use just to cushion the blow of rejection. But getting as much info as needed will help in the end
Hope this helps.
advice Elix about using a few banks and you'll gain some knowledge along the way and hopefully go out and find a bank that will work with you.
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Thanks, I will send that to my dad. My dad actually knows the president of this local bank, cause I guess the guy worked with him directly on my dad's first deal(which was a trailer park). The president said come to him anytime we were working on a deal. I will definitely let him know to test this on some other banks first. I guess if they would say no to seller financing, I could ask, What could we do/need that would allow you accept seller financing?".
Thanks I appreciate the help!
RENinja
"Remember, success is a journey, not a destination.
Have faith in your ability."
Bruce Lee
The better approach is to have the 20% down, and then get reimbursed the 20% from seller financing at the close. That way you're still not out of pocket in the end, but are coming into the deal with your own funds (skin in the game). The bank will still have approve the 20% seller financing (2nd mortgage), but as long as the deal is good, they shouldn't have a problem. Having a good relationship with the local bank is also key.
I did a deal once with $100k 1st mortgage from the bank, $25k 2nd from the seller, on a property appraised at $180k. Because the bank's 1st mortgage position is $100k on a $180k property, they were fine with it.
Also make sure you ask for at least a 5 year balloon on the 2nd from the seller. Time flies!
- Tom
Thanks for your help. Me and my dad appreciate it.
RENinja
"Remember, success is a journey, not a destination.
Have faith in your ability."
Bruce Lee
Depending on your exit strategy.. I would recommend trying hard money lenders before banks. There are some good hard money lenders who will loan you the full purchase price and rehab. They usually just charge you points up front or the closing costs to have skin in the game and a higher interest rate. The higher interest rate is no big deal, because it will be a short term loan anyway.
But you do not have to be pre-approved like you do with a bank and you can get the cash to close in 2 weeks or less (very useful when negotiating with sellers) instead of 30 days or more. I always recommend hard money over bank financing when buying a house that needs any kind of rehab. Keep in mind you will have to buy the property at ARV x .7 - repairs to even have a hard money lender consider the loan. If you can get a lower price than the above example you can get your hard money approved much easier and usually receive lower rates. All a hard money lender is, is a private money broker. Hard money lenders usually have a ton of private money (millions) and they then broker it out for higher interest rates and fees.
You would then purchase the property for a little money out of pocket (usually $10k or less depending on price). You then do the repairs and sell the property to pay off your high interest hard money loan. If you plan on holding the property as a rental, you can go back to that same LOCAL bank and have them refinance the property at 70-80% LTV. It's a lot easier for banks to refinance your properties nowadays then to get them to do the original loan on an investment property. When refinancing they only see the improved property (good condition) and see it as a sound investment to give you a refinance at 20-30% below it's value.
Good luck with whatever way you decide to go. Private money is obviously the ultimate goal, but for most people it takes time and experience to raise private funds (me included).
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The Flip Kid
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I have a HELOC loan that I am using to buy rental property with 25-30% equity in it and with a positive cash flow after I get a mortgage on. I heard that I could only get 4 mortgages and then I read Angie Novigrod's testimony in Dean's book "Your Town" and now know I can get all my money back out over and over and over. I expect that I am moving into commercial mortgages at that point but I would appreciate info on this. I hope to buy the bulk of the houses in Kansas city area so if anyone has references of banks or mortgage companies to use there I would appreciate it.
Janet
Hi, its very very difficult to convice a traditional bank to grant you 100% financing. Even though they are not offering a 100% loan they, like every other lender, knows that no "skin in the game" spells higher risk. Also, 100% financing makes for less cash flow. I suggest using other lines of credit you can get, getting another partner with the cash, or offering up additional piece of collateral to convince the bank to increase their loan amt. If you get a partner, you can have them tender the cash as a down payment at the close, but you can still treat them as a lender if they like that better, including filing a 2nd Deed of Trust after closing, or simply record a Notice of Interest should the bank have a prohibiton on a 2nd mortgage.