Newbie trying to close on a townhouse w/conventional financing

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Newbie trying to close on a townhouse w/conventional financing

Helen Kirk
Rental Property Investor · Auburn, AL · Member since 2015 · 227 posts · 80 votes

Hi everyone,

Working on my first property:  

I've put in an offer on a 4br 2 ba townhouse for $80K in an area where the townhomes like this one are going for $120K and up.  It was accepted and I'm now to the point where I'm jumping through hoops with the bank.  They had given me a pre-approval letter earlier. I had a home inspection done, knowing it needed some work, including a new roof.  Now the bank wants a complete list of everything that needs to be done with an estimate of how much it is going to cost.  They want to have the funds needed for these repairs put into escrow at closing.  Is this normal?  Most of the repairs are cosmetic, with a new stove needed as well.  My own unofficial estimate is around $15K total (5K extra added just in case)

I have the extra funds for this, but was planning on using some of my credit cards for a lot of the work, and am a bit annoyed that I'm going to have to use my cash for the repairs!

I'm putting down 20% of the 80K, and my monthly payments on the remainder of 64K at 4% interest for 30 years will be around $380.00. I can get around $1200 - $1400 a month in rent, so cash flow will not be a problem.  My realtor is a bit annoyed with them as well.

After this experience, I think I'm only going to look for properties with seller financing!!! Not that I'm planning on flipping this property, but how do people flip houses if they have to put the money in escrow first???  I guess using conventional financing is not going to be something I use a lot of.

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    11y

    @Helen Kirk

    You could JV with the Seller, use your funds or private lender funds to rehab.

    What is the existing financing, amount of payoff, PITI, FHA or conv?

    If free and clear of mortgages, 

    what is the ARV after repairs, best price?

    Could you get $120K on resale?

    1. figure costs to sell at $8K, private mortgage.

    2. Note to Seller $70K

    3. list and resell and give agent 5% for both this purchase and resale.  Pay off note to seller in 3 months.

    4. re sale at $120K, less $12K costs to sell, less rehab.  Tidy profit.

    No Banks too. :)

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  • Helen Kirk
    OP
    Rental Property Investor · Auburn, AL · Member since 2015 · 227 posts · 80 votes
    11y

    Hi @Brian Gibbons   Thanks for your input!

    I don't have much info on the seller.  I understand it was owned by an old lady that was planning on living in it, but went to a nursing home instead.  The townhome had been empty for years when she passed.  The heirs just want to sell it quickly, hence the low price.  It was originally offered for sale at 74,900, but by the time I saw it (4 days on realtor.com) there were already two competitive offers on it.  I upped my offer and it was accepted.  I truly believe it would sell for $120K if not more when it is fixed up.

    Since the property is so close to the university here, it will make an excellent buy and hold rental investment.  I would rather not flip it.

    The lady I'm working with at the bank said there would be no problem with the loan.  My credit score is close to 800, but my W2 income is rather low.  My thought is that the bank wants to tie up the rest of my available funds so I don't go and spend them on something else... just my thoughts on this though.  I don't have any proof.

    I think once I get this property settled and working for me, I will look for my next investments to be more in the lease option/purchase area.  I have to get a bit more education on what all that entails though.

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    11y

    Hi @Helen Kirk

    You do not need bad credit to do creative deals :)

    I don't like banks and traditional mortgages.

    See

    http://www.biggerpockets.com/blogs/3-reiskills-and...

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    11y

    FANNIE just simply won't lend on a house needing a new roof.  Escrowing the money is the only solution, but you don't have to use the cash for the repairs......you can use your credit cards or whatever, and the escrowed money gets released to you upon satisfactory inspection.

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  • Marc Jolicoeur
    Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
    11y

    Yes, the lack of a stove might be another issue in addition to the roof.    It needs a stove to be "livable" and needs to be livable for Fannie or Freddie to take the note from the banker setting up the mortgage.   Did this new requirement only come after the bank sent in an inspector?

    Another option is to buy the house using a Hard Money lender loan. You should be able to get 84K in funding from a HM lender.  Use that money to buy the house. You will need to use your money to rehab the house, pay the monthly interest on the loan, and you will need some cash in reserves for unplanned items.    After you complete the rehab, rent it out for 6 months, then refinance cash out using  a conventional mortgage.

    If your estimates are correct you should appraise at 120K in 6 months and be able to get 90K (75%) in cash out easily after everything is fixed.  Use the 90K to pay off the HM loan.

    The feasibility of doing this depends on how much your HM lender will charge you for the 7 months before you refi, and how much cash you have available to do the rehab project and pay other holding costs.     

    Since you end up putting almost no money down, that could be an excellent way to do it.

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  • Helen Kirk
    OP
    Rental Property Investor · Auburn, AL · Member since 2015 · 227 posts · 80 votes
    11y

    @Marc Jolicoeur and @Wayne Brooks

    Excellent ideas, both of you.  I recently opened up a new American Express card that has $15K available at no interest for 15 months.  I could use part of that.  I also have $30K in the bank for rehab costs and the down payment of $16K on the property.  I just don't like cutting things short.  My dad tells me he also has 40K just sitting in savings that he is willing to loan me, but he wouldn't want to charge me more than 6% interest, so that makes me breathe a bit easier.  I'll let everyone know the outcome when I get this all figured out!  Exciting stuff....I'm hooked!

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  • Helen Kirk
    OP
    Rental Property Investor · Auburn, AL · Member since 2015 · 227 posts · 80 votes
    11y

    Update:  The bank that pre-approved my loan backed out when their appraiser decided that the property would take approximately 22K to rehab. 

    I went to my credit union and got a portfolio loan for 50K.  I'm putting down 10K and my dad is putting down 20K to make up the remainder of the $80K price.  This will leave me with 20K for the rehab.  I'll have a 20 year mortgage at 4.125, which will be around $305.00 a month.  My realtor says it should rent between $1000-$1200 per month when it is fixed up.  We close next Friday, September 4th!

    WooHoo!  I'm so looking forward to rehabbing this place.  I've also come across a local mentor that does a lot of student rentals in this area that is willing to help me manage this property and get some experience.  

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  • Chance Housos
    Investor · Sachse, TX · Member since 2015 · 223 posts · 66 votes
    11y

    Congrats Helen,

    I recently purchased a townhouse that wouldn't qualify for conventional financing with a small bank. They were very investor friendly and understand the process. If you have the cash and the deal works, just talk to multiple banks and find one who will work with you.

    Also, you may want to refi after you do the renovations and pay off Dad and pull what cash you can out of the deal to buy another. Make sure you save reserves for upcoming repairs. I like to use the rental calculator here in the Analyze tab. Even when I think I have everything in order it always reminds me of what I forget.

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  • Helen Kirk
    OP
    Rental Property Investor · Auburn, AL · Member since 2015 · 227 posts · 80 votes
    11y

    @Chance Housos  I was considering refinancing after the rehab, so I can have cash to find another property.  That is on the back burner right now though.  One of the requirements of the portfolio loan is that I have to keep the property for 2 years.  Otherwise, I'll have to reimburse the closing costs that they paid up front for me.  I'm not sure how a refi would work in this case, but it doesn't hurt to ask.

    I'll be repaying my dad next March.  I have nearly 50K coming in from an inheritance, and will use part of that to reimburse him.    He was wonderful to offer this loan to me.  That made it much easier to purchase this place and have enough left over to do renovations. 

    I would love to get to the point where I can pay cash for investment properties!

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