Joey:
Most prudent Note investors like to see that a prospective buyer has some money at risk. Occasionally a deal might be structured where the funding LTV is VERY Conservative, and / or the prospective buyers have a strong financial and credit profile and background, etc. to where some allowance can be be made on this point.
However we have found over and over again that when we trace back problematic files often it is where borrowers have very little money at risk. It seems there is little willingness for them to work out potential problems when they the’ve borrowed 100% and none of their own money at risk in a deal.
I?m looking to purchase a house through the means of owner financing.
The deed to the property is free and clear and the owner is willing to sell for $120,000.
After pulling comps I figure the market will bare $135,000 no problem.
The owner is willing to give me the deed, and carry his equity if I can give him $20,000 cash up front and agree to a 24 month balloon for the difference of 100K.
If you could help, I have three questions:
To offer my seller the 20k cash up front would it be best to structure one note for $120k (the purchase price) with a 24 mos. balloon and sell a portion of the payments, or should I split the 120k into seperate mortgages? AM I EVEN CLOSE?
Will I need to put cash down for a note buyer to consider purchasing?
What yield will the note buyer require or is there a standard?
All advice is greatly appreciated, Thanks again, Joey, Portland OR
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Joey:
I have done many a deal like you are contemplating. You really can go either way. Have the seller SELL of a “portion” of one Note to generate the $20K cash they desire OR better yet have them agree to carry back (2) two Notes - a conservative low LTV - loan to value 1st lien that can be sold off to generate the $20K cash they seller seeks and then a subordinate 2nd lien that the Sellers would retain for monthly cash flow until you can get them paid off in full.
Generally a Note Investor (like Sunvest) would like to see that you have something at risk into the deal - so as to create a sense of good will and commitment to the property.
Yield, the discount, what they will pay or fund, etc. will depend largely on the condition and location of the property, its intended use, how your employment, credit profile, and credit scores check out, and whether you have any money at risk or not…
It makes sense that the yield would depend on a number of factors, although I was hoping to enter this deal with zero cash or perhaps a fraction of my future buyers down payment