In today’s market, every financing option needs to be in play. The Owner Carry is one option you must learn to use when it is available. And sometimes you have to be creative to “Git Er Done”.
In this article, let’s look at ways you can get what amounts to an Owner Carry … even if the Lender won’t allow a traditionally structured Owner Carry.
With a 100% Carry you are golden …
When your Seller is giving you a 100% Owner Carry – meaning you give them a down payment and they carry all of the remaining debt – you don’t need a Lender. You are free to negotiate whatever terms you need to get ‘er done.
And if you are getting both an Owner Carry and a Conventional Mortgage, things can get sticky on occasion.
First, an Owner Carry is always much more difficult to obtain when you are assuming existing financing. It just is … plain and simple. You will want to look long and hard at any assumption that requires an Owner Carry because it is definitely like swimming upstream!
Remember: Carry + Loan = Combined Ratios
Any time you are getting a new mortgage and the Lender knows you have an Owner Carry in the works they will look at two ratios:
- The “Combined Loan To Value Ratio” (CLTV)
- The “Combined Debt Coverage Ratio” (CDCR)
They add up the Total LTV and DCR for both their loan and the Owner Carry and apply their standards to the Combined Numbers.
What if the Lender says “No” to your Owner Carry Deal?
Sometimes they say “NO” because the numbers don’t work under their lending guidelines … It looks to them like you won’t be able to make the combined payments. And sometimes it is just their Standard Policy with no good reasons behind it.
When the Lender says “NO”, MAKE ABSOLUTELY CERTAIN you take a second look at the numbers and that your Proforma still says the deal works … And if it does … here are a couple ways around your Lender’s Objections.
[In each case you end up with a structure that is equivalent to an Owner Carry, but without a Lien/Note recorded against the property.]
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Disclaimer:
This is not legal advice. These are solutions that have worked for me in the past. Absolutely do not use these deal structures without consulting your Attorney and Mortgage Brokers. And don’t do them at all unless your Proforma shows the deal works including the payments to service the Owner Carry or its equivalent.
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3 Owner Carry Equivalents
1) Promissory Note:
The Seller can loan you the money personally on an unsecured Promissory Note. They hold the note and you make the payments, but nothing is recorded against the Property.
2) Security and Pledge Agreement
The Seller can hold a note secured by your new equity (your entity’s Ownership Interest), in the Property and not against the Property itself.
It works like this:
- You form an LLC to take possession of the Property.
- That LLC has an equity / ownership stake in the Property.
- The Seller holds a note secured by the Equity Position of your LLC and not directly against the Property.
- They hold the note and you make payments, but again, nothing is recorded against the Property.
If you default, they get your Equity Stake in the Property.
3) They buy Into Your Entity
The Owner Carry is treated as a purchase of an Equity/Ownership stake in your title holding LLC. Your LLC takes control of the Property at the close and the Seller is given a “Preferred Equity” position that earns a Preferred Return from you.
It works like this:
- You form an LLC to take possession of the Property.
- At the close, the Seller gets an equity position in your new LLC equal to the size of the Owner Carry.
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NOTE: Make sure the Seller’s Equity is a fixed dollar amount and does not increase in value as the property value increases.
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- The Seller is placed in a Preferred Equity position that entitles them to a Preferred Return equal to the interest payment on an equivalent Owner Carry.
- The Seller gets their interest payments along the way in the form of Preferred Return payments … and when you sell, they only get their original stake back – just as if you had paid off a note.
All of these structures have worked for me in the past when the bank said no.
JUST REMEMBER:
1) The deal has to make sense with the Owner Carry – if the Bank says “NO”, make sure you double check your figures and that your Proforma still shows a viable deal … the Lender may know something you don’t.
2) And you MUST run these structures by your legal team and Mortgage Broker before putting them into action.
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