How to give the rehab lender 1st lien position on a F&C Seller Finance property?

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  • Scenario:
    Property is owned free & clear by the Owner/Seller, and he is ready to Seller Finance it for 6 months- 1 year. To get the rehab money from a private lender, the requirement is a 1st lien position for the Lender.

    How can such a deal be structured so I can lower the acquisition cost by getting the property owner/seller financed with a small down payment, and use the funds from the private lender to rehab the property in order to bring it to a higher ARV, and marketable condition? Considering the Lender wants to be in the 1st lien position, should the property be put in a Land Trust, and Seller asked to get in the secondary position with an incentive of a share in the profit, or is there another way to secure the Seller, and satisfy the Lender’s 1st lien position requirement?

    Seller gives a option to the Rehab guy for X dollars. Seller takes out loan for fix up costs

    Why would the Seller do that? Carry his own free & clear for 6 months to a year, and also lend money to the rehabber?. Why could he not just pay a contractor to get it done himself. He has another house he lives in, anyways.

    Don’t know the particulars on your deal. This is just another way to put a deal like this together.

    Jackie, I want you to advise me on structuring this. I have laid out everything in the initial post.

    Another thought. Of course all needed documents in escrow and a mortgage of option recorded. But deed the property to the rehabbers with the seller holding an option to buy the property back for a dollar. When the rehab or sell the property is option is bought out for his profit

    Thank you for the advice but that is not the question I posed.

    I am buying this free and clear property from the owner with the owner, owner/seller financing the property for 6-12 months, with me paying a small downpayment. The private lender I am asking for the rehab loan wants to be in the 1st lien position. How do I structure the deal since the owner is seller financing for 6-12 months, and is on the title, and of course will want to hold his control of the title.

    Let the lender buy the property with seller financing. They are in first position and much safer position for them. Negotiate the deal so it is no interest and no payments for 6 months if you can. then assign your contract to the lender so they close. The assignment fee could even be your rehab money.

    Or, after they buy with seller financing, then they can do a 2nd loan to you for rehab (though most will not do that unless you have a lot of skin in the game).

    They give you an option to buy the house for the balance of the loans and a time frame to get the work done

    if you don’t pay, they already own the house, no foreclosure for them. They will love that.

    When you get the house fixed up, then you just exercise your option to buy for the pre-agreed to price.

    That’s the best way for the rehab lender to get in to first position.

    Thank you, Jackie for your suggestions. So should the house be put in a Land Trust with the beneficiary defined as the e lender after I have the seller financing in order?


    No do not use a land trust. The rehab lender will probably want to take title in their company name. Don’t make it more complicated than it needs to be.

    When you assign the contract to the lender to buy the house with seller financing, that assignment fee could be your rehab money instead of a 2nd lien.

    Or, the lender may prefer to do a 2nd lien for the rehab money.

    You should do what makes the lender (and the seller) feel comfortable and secure otherwise, no one will do the deal. Keep it simple.

    Of course, you’ll get an option to buy the house for a certain amount of money within 6-12 months (after you do the rehab and sell to a retail buyer). Let’s say you buy for $50,000 with seller financing. The lender may way $55,000 for the option. This is negotiable but you should anticipate that the amount that the house is purchase for may not be the same amount of your Option.


    Buying Side:
    Buying on Seller Financing in its present state for: $64,000
    Down Payment: $5,000, OR ZERO down, and 10 %share in the back end net profit
    Term: 6 months, with the ability to extend to 1 year.

    Private Money Loan Side
    Assign Contract to Lender for a 1st Lien position with an Option to buy it back at my current price of $64,000 +5% premium of $3200= $67,200 Option buyback price.
    Lender again assumes 2nd lien position to lend me rehab money: 0 points, 10% APR paid upfront for 6 months = $75,000 Rehab loan + $ 3750.
    So the Lender earns: $3200+$3750=$6950 in 6 months on an investment of $75,000, which, if my calculations are right equates to 18.53% ROI for the Lender

    What do I get?

    ARV: $215,000
    Rehab Cost: $75,000 (includes adding a bathroom)
    Buying at: $0 on Day 1
    Paying Lender: $6950
    Selling,holding, and closing costs: $16,000
    Net Profit without the share of profit with Seller: $53,050
    Payback Seller: $64,000 + 5,300 (back-end profit share) = 69,300

    FINAL NET PROFIT: $47,750

    The lender should feel super safe with this scenario. Did you talk to them about it yet?

    Of course, they will probably dispense the $75,000 in DRAWS. You should give them a draw schedule with what work will be done 1st, 2nd 3rd 4th and the amount needed per draw. They lender will probably send an inspector out to make sure the work was done per code before the next draw is issued.

    Good job!

    Let us know how it goes.


    Hi Ayesha,

    How about this scenario?

    Buy the house with the seller financing at $64,000 with at least one year before you have to pay it off, then wholesale it.

    I’m not sure of your exact market, but if the house is really worth $215,000 and your estimates on rehab are $75,000, I would think you could market this property and net $30,000 to $40,000 without having all the items to worry about that have been discussed in the other messages.

    Additional benefits of this would be short time frame of ownership, much lower holding costs, much lower risk of something going wrong with the rehab or selling the property to a retail buyer.

    My personal opinion after 20+ years, is that a decent profit now is usually worth more than the hope of a larger profit after a rehab to a retail buyer.

    Just my 2 cents.


    I agree with Ben 1,000%!

    I would much rather wholesale this house than deal with a $75,000 rehab (which could cost much more) plus dealing with lenders.

    You should be able to wholesale for $104,000. Offer seller financing to your rehab buyer. Then give you $10,000 down then the other $30,000 within 6 months. If they need an extension, ask for an extra $3,000 to extend the seller financing another 6 months.

    Worst case scenerio, you get the house back half fixed up, then you can wholesale it again for even more money.

    Rehabs take a LOT of time and energy and stress. It is not worth it!!

    Let someone else deal with contractors, code enforcement, building permits, holding costs, etc, etc, etc… TAKE YOUR MONEY NOW!

    Ben, and Jackie, I agree with you. I have done enough rehabs to know how much these sub contractors make me weep by their unprofessionalism, and not really performing the way they are used to. We are in the investment business, so have to watch the costs like an eagle.

    6 month seems like a very good time frame for any rehabber to bring it up to marketable condition. What about the Seller? How do I handle his objection of me sandwiching the deal?

    Basically I buy on Seller finance, and do a wrap with my own seller finance to the rehabber buyer.

    Hi Ayesha,

    Short answer – the seller doesn’t need to know and/or approve that type of arrangement.

    What I would do – because this should be a short term deal (not much of a financial reason to stay involved), I wouldn’t wrap the financing. I would find a buyer that could pay me cash for the house and pay off the seller financing when I sell to the rehabber/buyer. In this market, the buyer should be able to have or secure their own funds. I would not want to be caught in the middle of a good seller that was willing to give me financing and a rehabber/buyer that can’t perform.

    After 20+ years I am much more conservative on deals than I might have been years ago, so just my 2 cents here.

    Hope that helps,

    So Ben, you are saying, I should just wholesale it?

    Not sure of your interpretation of wholesaling but, if it were me, I’d buy it with the seller financing (take title), clean it up as good as possible, and then resell it “as is.” Not sure if others would call that a wholesale, wholetail, or other type of deal.

    Clean it up, and sell- wholetail 🙂
    The kitchen has just 2 counters:-) I understand. Wholestailing will be the way to go – fast.

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