Question: We found a deal where the seller is willing to finance 30% and go on in second lien position. If the lender requires 70% LTV this is an ideal situation for us since we don’t have to bring money to closing. Is this realistic?
Answer: A seller’s 2nd cannot be used as a 100% down in a transaction where financing is involved. When the lender assesses its risk it also looks at the borrower’s contribution. Sure, the property, the location, and the management could be ideal. Yet when a buyer/borrower has no “skin in the game” he represents a high risk to the lender. Not to say this would happen in your case but the U.S. real estate bubble proved that it’s easier to walk away when a person has no money of his own invested in the transaction. The lender wants to be sure that when and if a borrower experiences hardship throughout the life of the loan he will do everything in his power to keep the property. One’s incentive to weather the storm is knowing what he’ll lose (his hard earned money) if he walks away.
This is also a good reason for lenders to not accept a seller’s second equal to the buyer’s down payment. A seller knows that if the buyer/borrower defaults his risk is high due to him being in 2nd lien position. Thus, with him being willing to offer a – large – second chances are he has already made most of his profit (from the lender’s loan which is paid to him at closing). Anything above that is icing on the cake.
Lenders are not in the business of owning properties. They prefer they mitigate the risk so they don’t have to foreclose. They want to lend money and be repaid back with interest.