I met with my friend Allen last week and he was telling me that he had a tenant (Robert) that wanted to be the buyer for his $300,000 rental property, but he could not figure out how to get the tenant qualified for the loan.  Allen had bought this property ten years earlier and there was only a $65,000 mortgage.  It turned out that the tenant had two car payments totaling $1,000 per month on a $20,000 total balance, and it seemed that without this extra income, Robert could not buy the property. 

Allen also told me that his tenant had made some improvements to the property totaling about $50,000 over the past 10 years.  Allen was going to credit Robert for his improvements by lowering the sale price to $250,000 from the appraised value of $300,000.  I thought that the Bank would think that sure sounded like a strong down payment for the buyer.   

I suggested that Allen and Robert go to a small community bank for financing.  They have more flexibility to make loans such as this.  I also suggested that part of the loan proceeds be used to pay down the remaining $ 20,000 of debt on Robert’s vehicles so there is more income to put towards the mortgage payments.  In particular, Robert could then afford a first trust from the Bank of $190,000 at 6 % and he was willing to use $20,000 from the $190,000 to pay off his car loans.  This meant that Allen was only going to get $170,000 from the Bank  After giving the $50,000 credit, Allen needed to hold a second trust of $80,000 ($300,000 - $50,000 - $170,000 = $80,000).  As long as Robert qualified to make the payments on the debt of $270,000 ($190,000 + $80,000), this deal could go through.  The ratio for the Bank loan was 190/300 = .633 loan to value – a very comfortable margin for the Bank. 

Finally, I realized that if my friend, Allen, was going to get his price for the property, he was going to have to hold the financing at 4% (a below market interest rate) on his portion of Robert’s debt..  However, if Allen put money into secure investments, he felt that his yield was going to be no more than 5% anyway.  Since the tenant and Allen were well known to each other, there did not seem to be a problem here.  This deal worked because of the creative removal of debt for the tenant having to do with his auto loans, and the creative use of a seller take back mortgage at an interest rate that helped the borrower qualify. 

Share This