A Question about downpayments - Posted by JamesL

Posted by JohnBoy on October 25, 2000 at 01:59:27:


I wasn?t sure, but I didn?t think you were referring to deeding a property over in this case being fraud. When you wrote that statement in the paragraph like you did I just wanted to be sure on that.

My deal wasn?t the same type of deal as this one. Mine was for the purpose of getting a business loan. Had nothing to do with buying real estate. I went into the bank wanting to obtain a SBA Loan. After the bank had reviewed my plan they decided they would like to find a way to write the loan through the bank and not bother with SBA. Naturally, I didn?t have a problem with that!

The one problem they had was that they wanted a way to show something in their paper work to justify them for writing the loan. At the time I had these lots which I just purchased on contract three months prior. I had a business that I purchased with owner financing. I had my personal residence, which I was buying on contract. Everything I had was purchased through using seller financing. I had equity in everything, but nothing had enough equity to support the amount I was trying to borrow. I had good credit. Showed little to no income on my tax returns and low credit scores because of high debt ratios and a lot of inquiries.

The banker said I had equity in everything, but it was all spread out. That?s when I suggested that they refinance my two lots, put a new first on them to pay off the contracts, write a second for the working capital I needed for the business loan and use the leasehold improvements as collateral for the installation. He said he could do that! All he needed was the appraisals on my lots to come in high enough to pay off the contracts and have enough equity left to cover the amount on the second. The rest would be secured by the leasehold improvements. He said they could use that to justify writing the loan. He also said that he was taught in school if a deal only shows a dollar for a profit that they should do the deal because it shows it’s profitable. Hey, that?s what he said, me, I thought he was nuts myself!

Since I just purchased these lots I was worried the appraisals wouldn?t cover the second, so I called the sellers and explained what I was trying to do. I told them the bank had appraised the land which came in at the price I paid them for it. (I know, I lied to the seller about the appraisal amounts the bank had said they came in at, shoot me! :)) I told them the bank would loan x amount and if they would take x amount as payment in full, I could pay them off within the next two weeks. They both accepted the offers, so I was able to get a nice discount on the contract amounts owed. That created enough equity I needed for the bank, which I told the bank I was going to see if the sellers would take a discount. He liked that idea!

My point about my deal vs. this deal is, if the bank would accept vacant land and leasehold improvements for a business loan on a new business start-up, then why wouldn?t it be possible to get them to do a loan on something like this using the same strategy with one or two of the seller?s properties? My deal was at much higher risk being a business loan vs. buying real estate producing income to support the loan. (Assuming of course the deal would support the debt and be able to show a profit. I agree that the deal has to be there or it will never fly.) If my business didn?t make it, what would the bank have as security? The real estate that housed the business was being leased in a shopping center. The leasehold improvements, once installed, would have no value to it for the bank to take back. In fact, it would cost the bank more to remove it than what they could get out of it by trying to liquidate it. The land was leveraged 100%, which they would have lost money on if they had to take it back and sell it. Plus, with being vacant land, how long would it take to sell if they needed to? This other deal would have good marketable real estate producing income if they had to take it back.

If my deal would be considered solely or partially stupid on the Banks part, then keep going to another bank until you find one that is just as stupid! :slight_smile: I mean, if there is one stupid bank out there, then you know there has to be others that are just as stupid.

I can see your points on this deal whether it?s even a deal or not and whether the income is there to even support itself and still be profitable. The one thing that throws up a big flag to me on this deal making it very questionable if it?s even a deal or not, is the fact that the seller is offering to put $50k into the buyers account to use as his down payment. That makes me suspicious right from the start.

But ?assuming? that this would be a deal and you have a seller willing to put up $50k to help get the deal down, I?ll use this as an idea that might be a possibility to get it funded.

I can see your point on deeding the property over. So instead of just deeding over the property and making this look better to the bank without trying to make it look so obvious, I?ll structure it like this, assuming of course the seller has sufficient equity in the property where the buyer would be getting a deal.

Have the seller take one or two of the properties and sell them to the buyer on contract, below appraised value. Don?t structure it to where they have the full $50k needed in equity since you wouldn?t have owned them long enough. You may need to work this deal over a period of 3 months to make it more attractive to the lender.

Once you have all the numbers worked out and a good plan put together to approach the bank with, tell the banker you had purchased two of these properties a few months ago from the seller. After you purchased the property, the seller had called you a couple of months later asking if you would be interested in buying all his other properties because he?s wanting to sell everything he has. The problem is he won?t sell the others on contract because he says he needs his cash out of them.

Now ?assuming? the deal is a deal and the numbers work and you have a GOOD plan put together to submit to the bank, you proceed to explain your intention while the bank is looking over your plan. You tell the bank that you were able to get a decent deal on the first two properties that have a fair amount of equity in them. The problem is that you don?t think the properties you have will appraise high enough to give you the equity you would need to borrow against for all of the down payment needed. BUT! The seller is ?motivated? and really wants out! I think I can get the seller to take a discount on the balance I owe on these two properties in exchange for buying all his other properties. Mr. Banker, you can refinance the two properties I already have by paying off the contract allowing the bank to write a second against the equity. If the seller agrees to a discount (which he will since this is part of the plan instead of having him stick $50k in the buyers bank account) it will give me more than enough to come up with the down payment needed for the other properties which produce enough income to support the deal and still show a decent profit coming in.

By presenting it in a way simular to this, it doesn?t appear as obvious to the bank what you?re really trying to do where if you just walked in right after getting the property with a large amount of equity in them like that.

My guess is that ?IF? the bank would consider doing the deal that they would probably do a blanket mortgage on all the properties together vs. funding them individually.

One thing is for sure in my opinion. The deal will have to speak for itself, meaning it?s a strong deal, the buyer is going to have to present a solid plan to show this and he?s going to have to be able to present it good enough to sell the bank on wanting to do the deal. If that can be accomplished and the buyer has good credit, then I think you could get around the low personal income issue and seasoning issue with the other two properties.

STRONG DEAL, SOLID PLAN, GOOD CREDIT and the ability to walk into the bank and SELL YOURSELF to the banker getting him to WANT to write this loan! If you can package all that together properly and have all the pieces fall in place, then you might have a fair shot at pulling this off.

It?s not going to be easy and it will require some time and work involved with putting it all together, but if you get that far, the worst that can happen is they say no! At the minimum you?ll get a good learning experience from trying it. The question is, whether or not this is a deal or not before getting into all this. First determine if it?s a deal, then proceed from their if you?re willing to put all the time and effort into this and try to get it funded.

A Question about downpayments - Posted by JamesL

Posted by JamesL on October 23, 2000 at 17:13:00:

The deal I have planned looks like this so far…
There are 16 units in 9 properties I plan to buy from the seller. Two properties are 4-family, one is 2-family, and six properties are 1-family
houses. The total purchase price for all of these will probably be around $510,000.
My partner and I have good credit, but no cash or
assets. Obtaining bank financing should be no problem, but we have no down payment. We only earn around $200 per week working at a
The seller will give us whatever the bank will require as a downpayment. That way, he still gets his properties sold, and receives lots of cash
from the bank.
Our problem is finding a way to transfer the downpayment money from his bank account to ours without losing the loan. The mortgage
company says that the downpayment money must be “seasoned” in an account for at least 60 days before it can be used. In addition, I
expect the bank to investigate us if we have $70.00 in the bank, and then deposit $50,000.00 suddenly!
With so many other things falling into place (finding the properties, finding the owner, negotiations, viewing the properties, finding a lender,
etc), it does not seem right that this little problem should get in our way…
I have gotten lots of great responses with ideas, and they are really appreciated.
Any more ideas on how to work through this??
Thanks for the reply

Re: A Question about downpayments - Posted by JPiper

Posted by JPiper on October 23, 2000 at 19:49:34:

A good trait to develop is to understand WHERE you?re headed BEFORE you start. ?Begin with the end in mind? is how I?ve seen that thought expressed. The problem here is that I see nothing about your EXIT STRATEGY. Now perhaps you have one and just didn?t post it?.but without it I would find it VERY difficult to evaluate your situation.

There?s more to real estate investment than simply scrambling around for the cash to close. For example, assuming you were able to get your hands on sufficient cash or assets to close?.the question is do these properties cash flow after realistic expenses, deferred maintenance, and debt service? If not, then HOLDING is not an alternative. To be scrambling for a downpayment to close a deal that won?t cash flow is a waste of time?..and chances are the bank won?t approve the deal for that reason alone (even if you had the money).

I?d be much more apt to acknowledge one simple reality?..you don?t have the cash. And therefore, right now you are not ready to hold. Rather, I would be evaluating the properties themselves in terms of their market value versus what I could buy at plus their repair cost. I would be more interested in attempting to tie up the properties on a type of rolling option?where I sold one property, and rolled the funds to the next, until I had them all sold. Of course, for this idea to work, you need properties that are a significant discount to market value. We don?t know if that?s the case here.

My guess is that attempting to put a loan together in your current situation is unrealistic (without knowing a whole lot more details). Forgivable notes are not going to be approved by the bank, nor are outsized repair allowances. Having the seller deed you a property to use as collateral for the loan is probably unrealistic as well since you don?t appear to be a strong borrower and you may be confronted with seasoning issues on the title of that property. Maybe you can find a way to ?pull the wool? over the bank?s eyes?sometimes called fraud?.but I wouldn?t suggest it.


Re: A Question about downpayments - Posted by JohnBoy

Posted by JohnBoy on October 23, 2000 at 18:29:16:

Does the seller own any of these properties free and clear? What would they appraise for separately?

If none are owned free and clear, how much equity does the seller have in each property?

Since you said $50k as the amount the seller would put up for a down payment then I’m assuming you can get the financing at 90% LTV with putting 10% down?

What is EACH property worth vs. what you would be buying them for?

Basically, if the seller has at least one or two properties with $50k equity in them, then have him deed one or two of those properties over to you. You can give him a “Quit Claim Deed” to hold so he can record that to take the property back if the deal fell through. Now that YOU own that property with $50k equity in it, you use that to pledge to the bank as your down payment needed. Have the seller split the $50k up between the remaining properties to boost the selling prices to make up for the $50k equity you got from him by deeding the property over to you. As long as the other properties have enough room between them to boost up the selling price on those where they will be within the appraisal amount you should have no problem.

Now instead of needing to show the bank you have $50k in cash that has been in your bank account for 6 months, instead you say, “hey, I own this property here that has $50k equity in it. You can use that equity as my down payment!” That should solve the seasoning problem with needing to show where the cash came from and having to be in your account for 6 months!

Re: A Question about downpayments - Posted by Tom Kinrade

Posted by Tom Kinrade on October 23, 2000 at 18:27:28:

Let’s see you have no cash and make $200 per week. The last time I financed income property the mortgage company wanted 30% down and a reserve of 6 months payment on 500k. Be sure to let me know what bank goes for this deal.

Re: A Question about downpayments - Posted by Jim IL

Posted by Jim IL on October 23, 2000 at 17:36:38:

Why not just have the seller carry a second for the amount he wants to “give” you for the downpayment and forgive that note after closing?
As long as you tell the lender on the first about it, it will not be fraud.
Some sort of “Repair allowance” at closing.
The seller sells to you for the $510k price, and then rebates you whatever you need at close for the downpayment?

Just an idea, frankly I haven’t a clue whether or not this will fly with the lender, but being honest with them is better than scamming them in some way IMHO.

Good luck and let us know what happens,
Jim IL

Re: A Question about downpayments - Posted by JohnBoy

Posted by JohnBoy on October 24, 2000 at 08:22:10:

I don’t see where fraud would come into play by having someone deed their property over to you. If that were the case then I guess a lot of investors would be guilty of this. Another way you could accomplish the same thing is by having the seller sell you one of the properties below market value on contract. Then you can have the bank refinance your contract giving them a new first position and new second to use the equity for the down payment on the other property.

Since he wouldn’t be considered a strong borrower (assuming his credit is good, but income is low) having a property with enough equity in it would add some strength to his borrowing power.

The reason I say this is one way to accomplish this is because I’ve done this in myself being in the same situation as far as being considered a strong borrower. Self employeed, showing very little income on tax returns, high debt ratios to credit limits, low FICO in the low 600 range, but excellent payment history. Instead of being able to provide improved real estate producing income to support the debt (assuming his deal will if the numbers work) as the collateral for the loan, mine was vacant land (which banks as a rule will only loan up to 50% LTV) I was able to borrow more than 100% LTV against the land using that as the main collateral with weak collateral on the balance. I used two vacant lots for this loan, both together worth about $57k retail, borrowed over $70k against them, both recently purchased on contract with seller financing. Although I didn’t apply for the loan immediately after purchasing the land, it was 3 months after entering into the purchase contract when I got approval for the loan. The bank paid off both contracts putting a new first against both properties, a second mortgage, plus a line of credit totally 3 loans against those two properties.

Instead of having income producing property as collateral, it was vacant land. My thinking on this deal is, assuming the numbers make sense and can support the deal, why wouldn’t this work in this case if it worked in my case using vacant land?

Of course, his credit will need to be good, the deal will have to speak for itself, and he will need to be able to package it properly and properly present it to the bank in order to sell himself on getting the bank to want to do his deal. A lot easier said than done, but certainly something that is doable in my opinion if properly presented and packaged right. This will also have to go through the commercial loan department instead of the residential loan department. The commercial loan department is much more flexible for doing this type of a deal.

I agree with everything else you said about understanding where he’s going with this deal and having an exit strategy. He will also need to know this and have it presented in his package when going in for the financing to have any chance of getting approved.

Re: A Question about downpayments - Posted by JPiper

Posted by JPiper on October 24, 2000 at 17:01:55:


I was not attempting to imply that the seller deeding a property to the buyer was fraud. I do see that my ?fraud? statement was in the same paragraph though. Rather, what I was attempting to say regarding this deeding idea was that I thought that a lender would have seasoning issues with it.

But then again, how does a borrower in this scenario present a ?free and clear? property to a lender, in which he has an ?unofficial? debt with the seller of the property incurred a matter of days before? Would the lender inquire as to acquisition date? If there is an acquisition date, then would seasoning be an issue? Would the lender inquire as to the price paid? Perhaps want to see a settlement statement or contract? What about income associated with the property? Will any existing lease be assigned to the new ?buyer??

I think all of this could be handled truthfully of course. But in the process of ?striving? to obtain this loan I could just as easily see a few facts left out. And this still does not deal with the seasoning issue. Perhaps a very low purchase price could be negotiated on the first property, leaving sufficient equity to finance, and the difference taken up by the other properties. But frankly the banker would need to have his eyes shut to not understand this deal.

What the deal boils down to is that a borrower with $200 a week income (as I understand it) is attempting to leverage himself into a $500K deal with the banks money, with no cash. I think there is a ?slim to none? chance of that happening. But further, I would lay odds that even if the financing could be put together, that the numbers don?t support this deal. If I?m right, even the borrower should not want to do this deal, because one slip and the deal unravels. However, understand that this is idle speculation on my part.

As far as your deal is concerned, I don?t know if it?s the same as this deal?not enough details from either side. But as I recall, this deal took place several years ago, at a time when seasoning issues were less of a concern than today. Further, there was another aspect to your deal as I recall which the funds were being used for which may well have been compelling for the bank. Either way, a loan against land in excess of value is a tribute to either your silver tongue or the banks stupidity?.or perhaps both. Unless the poster above has a VERY compelling deal, I don?t see this happening.