Question Regarding Financing

[jc1409]

I've got a HUD home under contract, which needs some rehab before it would be ready to live in--paint peeling on detached garage (which I'm told is a BIG deal), wood floors need refinishing, kitchen and bath need updating. I've talked to two conventional lenders (no issues with credit or income), but they tell me that due to property not being in good condition, I should likely look elsewhere (cash or hard money) because if appraisal comes back saying its not livable, they will not loan due to condition.

I've found a lender who will do:
- prime plus 2 floating
- require 10% down
- allow borrowing amount to include rehab costs, with draws permitted during term
- max term 12 months
- 1% prepayment penalty during first 12 months (unless through one of their lenders)
- interest only during term
- 70% ARV
- 2 points cost


I'm new to this, so was wondering if anyone could give me feedback on the above? My strategy is buy and hold, purchase price around 40, ARV between 80 - 120k after $15k put into it. I think I understand costs and dollar impacts of this, but wanted to see if any seasoned experts could lend any thoughts or suggestions? Assuming this comes together, I plan to detail out my rehab and share anything I can along the way--Thanks to all on the board

Jeff

[Randy (SELA)]

Have you talked to a local bank about a rehab loan?

[jc1409]

Thanks Randy--I've got some calls out to local banks, but need to follow-up. I've heard from a couple of local banks that they won't do this type of loan.

[Randy (SELA)]

I'm sure somebody does rehab loans in your area, you just have to find them. Locate some of the local investors or the REI club in your area and talk to them. Talk to a mortgage broker, they usually know investors in the area. That ain't no hill for a stepper.

[Peach State Property Buyers]

Ask the banks about a construction perm loan instead of calling it a rehab loan. Most loan officers are familiar with one term and not the other.

[Dan Auito]

Contact hud and look into the HUD203K Loan program. You'll have lenders galore pounding down your door.

[jc1409]

Thanks to all! I called a number of banks (not telling them the 'construction permanent') thing and didn't get anywhere. Income good and credit score in mid-700s. I was telling them 'rehab' and that probably sent them into thinking of a different type of loan. None of the banks in the area that I called seemed to be familiar with lending for my purposes, which I thought was strange. For the next one I'll do my legwork better on this!

I went with the loan I described in first post--here's the detail:

$40,000 contract price

12 month max term
10 % down (so loan amount 36,000)
Loan is prime plus 2% floating (currently 5 1/4), interest only
2 Points (so $720)
I could have financed rehab costs but chose to only finance acquisition amount and will fund rehab costs separately--either cash or lower cost money)

I'll refinance within 12 months, at this point not planning to pull cash out on the refinance. House is HUD home, on market mid last year for $140k, listed at 80k when I offered 40k. I'm getting $2k as broker, 1200 toward closing costs. Comps between 90-120k right now. Plan is long term buy and hold with rent, with about $15k rehab costs.

Jeff

[jc1409]

Contact hud and look into the HUD203K Loan program. You'll have lenders galore pounding down your door.

Thanks Dan--without doing homework, I was under the impression this is for owner-occupied only?

[Debbie]

I have noticed many threads similar to this one.

I'm more convinced than ever to keep saving my money. When the right time comes (very near future), I'll pay cash for everything. Then rehab and sell (ie flip) or hold (get equity loan). It appears to be the only way to win against lenders' willingness to loan.

[jc1409]

Thaks Tim--agreed. My plan is rehab turn around as fast as possible (3 months is my plan, hopefully conservative, based on having full time job--with secret thoughts in the back of my mind that it will take 1 1/2 to complete), with worst-case risk being me paying cash to take out this interim loan, which I'm prepared to do if need be.

[Randy (SELA)]

Guess I'm the exception here. I have had no problems whatsoever getting 100% rehab loan financing with no money out of my pocket.

[The GUY]

Guess I'm the exception here. I have had no problems whatsoever getting 100% rehab loan financing with no money out of my pocket.

Institutional or private?
What are their terms?
Is your rehab cash post purchase or as a part of?

That's too juicy to not get more information!

[Randy (SELA)]

Local bank, commercial loan, rehab and purchase cash included, interest only for four months, then 20 year fixed @ 7%. Property is a 4-plex. This is our fourth rehab loan with them. Purchase and rehab amount always included in the loan. They will go up to 80% of the ARV, 90% if I ask them nicely.

[jc1409]

Not sure if this makes a difference, but the home I'm looking at is single family. I'm wondering if this (or some other aspect of what I'm specifically doing) puts me in a non-commercial loan situation, which is why I didn't find any programs with available banks here? We never even got into talking about terms, loan amounts, credit, etc.--they just asked me what condition the property was in, and when they heard it needed work, they said they weren't able to do it.

Well, I'm already starting to check around now for financing for next one, although I'm being told that programs are changing weekly, so don't rely on what I learn now, for loan in a few months.

[The GUY]

Not sure if this makes a difference, but the home I'm looking at is single family. I'm wondering if this (or some other aspect of what I'm specifically doing) puts me in a non-commercial loan situation, which is why I didn't find any programs with available banks here? We never even got into talking about terms, loan amounts, credit, etc.--they just asked me what condition the property was in, and when they heard it needed work, they said they weren't able to do it.

Well, I'm already starting to check around now for financing for next one, although I'm being told that programs are changing weekly, so don't rely on what I learn now, for loan in a few months.

The loan you are seeking has problems because the home is being described as "un-livable". So in your original post when the banker/investor told you the appraiser would have to mark it as such this is why they are turning you down at the door. If the home is un-livable NOW, regardless of what price you paid and or what your intentions are to complete the project this gives them a property that they (in the case of default) would have to fix themselves. Or you can look at it as the security you are offering them is not sufficient to for them to lien in their opinion.

That being said, some lenders/investors will allow for a cross-colateralized loan whereby you offer more than one asset (home) as security interest to protect the loan. These are not typical loans in banks unless you have a proven history and track record of your work and perhaps even have a depository relationship with the bank to influence the decision.

I would reach out for an experienced mortgage broker in your area to see if they can assist you. If that still does not work, stop looking for a loan and start looking for a PARTNER. Give up some profit and learn from you situation and don't get caught in a property like that again.

[jc1409]

Thanks They Guy--makes sense. Since this is the type of property we've been targeting, sounds like good advice, with refinance after home becomes 'livable' to bank's standards.

[Randy (SELA)]

This is the first multi we've done. The previous 3 were SFH. I agree with the Guy, you should seek out an experienced mortgage broker. I guarantee you somebody in your area is making the loans you seek. If you have access to clerk of court records, look up some of the names of investors in your area and you'll see where they're doing business.