Stack method funding and the seller carryback

It's called the stack method because you're stacking a DSCR loan on top of a seller carry loan. The technical term is a seller carryback.

Start with equity, which is just the sale price minus the loans against it. A house selling for $250,000 with $100,000 left on the mortgage leaves the seller $150,000 of equity.

That $150,000 is what the seller walks away with at closing. And it's the number the whole structure depends on.

So instead of handing them all of it, you ask a different question. What if they take $50,000 now and you make payments on the other $100,000?

Same $250,000 property. Your buyer is an investor, so they go get a DSCR loan, which is underwritten against what the property earns rather than what they earn.

A DSCR loan typically runs 80% loan to value, so it covers $200,000. That leaves a $50,000 down payment.

In the classic version of this story, that is where it ends. You go save up $50,000. In a stack deal the seller carries $100,000 of their equity as a second-position note, and that covers the gap.

The carry can never be larger than the seller's equity. They cannot give you more than they have.

Here's the piece almost everyone misses.

The title company will not create that seller carry note until the transaction closes. So on closing day the money still has to be on the table, even though the paperwork says the seller is carrying it.

That gap is the only part of a stack deal that is transactional funding, and it is what we fund.

We fund whatever the first-position lender isn't. That means the down payment plus closing costs plus agent fees plus assignment fees. If the down payment is $50,000 and there's $5,000 of closing costs, $5,000 to the agent, and $5,000 in assignment fees, we're funding $65,000.

We get paid back out of the seller carry note. The contracts state that our money comes off that note first, before anything goes to the buyer.

Which gives one clean test. The amount we fund has to be less than the seller carry.

Carrying $100,000 and we're funding $65,000, that works. Carrying $50,000 and we're funding $65,000, that doesn't, and no amount of enthusiasm about the deal changes it.

Check that number before you come to us. It will tell you in about ten seconds whether you have a fundable deal.

Your DSCR loan sits in first position. If the property gets foreclosed on, that lender is paid back first. The seller carry sits in second position and gets paid after.

A lot of lenders write language into their documents saying they do not allow second-position liens on the property. And what some people do is simply not tell them, record the note afterward, and hope nobody looks.

That is mortgage fraud. Not a grey area, not aggressive structuring.

So our process on every single stack deal is the same. We contact the first-position lender and ask whether they are fine with a second-position seller carry. If they say yes, we're good and we fund. If the borrower asks us not to tell the lender, we're out.

Run the arithmetic on the example. A $200,000 DSCR loan plus a $100,000 seller carry is $300,000 of debt against a property that just sold for $250,000.

That is negative $50,000 of equity from day one. If you had to sell tomorrow you would be $50,000 in the hole.

That isn't a risk that might show up later. It's the arithmetic of the structure, and it's true on every stack deal.

Which is why this suits experienced investors with income elsewhere, and why it is a poor first deal. We will fund it. We would rather you go in with your eyes open.

Seller carry-back funding starts at 2.5% of the amount funded, with a $2,500 minimum. It carries more than a double close because there is more to structure and more to verify.

The fee comes out of closing. On the $65,000 example 2.5% lands below our minimum, so the fee is $2,500.

The rate moves with the size and the complexity of the deal. We will tell you the number before you commit.

Stack deals take more verification than anything else we fund, so send all of it up front.