Hey everyone,
Just a short note to clarify my thoughts regarding vendors leaving a % stake in the property to enable the sale. Perhaps Steve or Bruce or whoever maybe able to clarify whether my understanding on this is correct (in a nutshell). [?]I guess using an example maybe the best way to put across my understanding on this.
Let’s assume you have found a property for sale for $500K. In order to do the deal, you need the vendor to leave 20% ($100K) in the deal.
So based on this, you would go and get finance on the property from a bank, of $400K (based on valuation of the property of $500K), which would satisfy their lending terms of LVR 80% (I know that some banks have LVR’s up to 95% but 80% just seemed like a good figure). Therefore, you would have a mortgage of $400K @ x% with abc Bank, and a mortgage of $100K @ y% with the Vendor.In a nutshell, is this correct. Is this how it would go theoretically? I assume that you would need to negotiate a % interest on the amount left in by the vendor, as well as have an exit strategy of when you plan to pay out the amount left in by the vendor etc. but as an example, am I on the right path?
Steve, (or anyone for that matter), do you have or do you know of a spreadsheet that is available that would allow someone to plug some figures into it in order to make these calculations and how the property would perform from a cashflow point of view? [
]Thanks. Looking forward to the feedback.
Matt
[]Hello Matt,
You seem to be on the right track.
The finance left in the deal would usually be a second mortgage. The only ‘x-factors’ in such a deal would be the time of the loan and the interest rate. Most 2nd mortgages that I have seen haven’t been for more than 5 years… but this is certainly something that can be negotiated on a case-by-case basis.
You could do up a simple spreadsheet to cope with the numbers using the @pmt function.
I might have a go at something and put it up for people to download as a freebie if enough people ask.
Bye
Steve McKnight
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
G’day Matt,
Don’t forget to figure in closing costs when you do the numbers.
Also the 100K left in the deal by the vendor will usually need to be paid out in a short period as Steve mentioned, this is a P&I loan on very short term.Cheers
watto
Melb FreestylerHi Matt
don’t forget to be completely clear with the major financier in the deal. Some do not like 2nd mortgage interests, some do.
One of our lenders told us that they would usually have a deed with other mortgager revealing and limiting their interest in the security.
cheerio Bruce
A dumb question, but why would a lender (the bank or the vendor) want to be in a situation where the LVR is 100%?
The $500K property is security for $400K to the bank and $100K to the vendor.
I have no real knowledge of 2nd mortgages so is the bank more entitled to the security (as a 1st mortgage) than the Vendor, with a 2nd Mortgage, if something goes wrong?
Kevmeister !
Hey, can we call you meister for short ? <grin>
How I understand this is that the first mortgagee has first rights over the equity (property) and as such in a foreclosure situation have the first bite of the apple. The second mortgagee gets the remainder.
This is why the second mortgagee is usually the one who triggers the foreclosure in order to limit their exposure to loss.
In our discussions with lenders, some will take the position of a lower LVR if they are requested to allow a second mortgage on the security.
Hope that helps
the Bruce
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