Newbie questions on BRRRR

[David Sisson]

So, I'm gearing up for my first BRRRR - IE: working on getting some $ together, and searching for potential homes. Ideally, I'd like a 2 - 4 family.

I'm having some problems wrapping my head around a few of the BRRRR concepts and hoping someone can help.

1) Wondering how to finance the property initially. Cash is out of the question, but I can probably come up with 20%. I think this means I'll need hard money. Is this correct, or are there other options? 

2) I'm worried about hard money, mainly that I won't be able to rehab and rent before the hard money loan is done. I know you can get 12 month hard money loans, but what other options do I have? I don't want to lose the house if I can't rehab, rent, and refinance quick enough. 

3) I'm also not sure how to work out the math. The 70% rule makes a lot of sense to me, but I'm not finding properties that are cheap enough. I have a fairly good idea what rehab can cost, and what the holding costs would be, but the properties all seem to cost more than 70% of ARV + rehab costs.

Here's an example: a local 3 family - in horrible condition - needing all systems, gut renovation - roof, windows, siding, can cost less than $100K, let's say $70K. These are hard to find, but sometimes available on the MLS. I figure rehab will cost something like $50K per unit (including electrical, heat, plumbing, finishes, etc) and the exterior will be another $50k. This means a rehab cost of $200k, for an all-in of $270K. The ARV is right about $270K, because these homes are not in great neighborhoods. It'd need to hit $360 - $385K for the all-in to be 70 or 75% of ARV. These neighborhoods don't support those prices.

Honestly, a lot of these homes cost much more than $70K.

This one issue has been a huge stumbling block for me. Hoping someone can help. I imagine that potential answers would be:

1) Buy the home cheaper

2) Spend less on renovation

3) Get a better grip on the ARV - maybe it's higher than I think.

Help? 

[Ned Carey]

@David Sisson I'll make it simple - YOU ARE WRONG

There do you feel better :-)

First you have only mentioned 2 of  many reasons properties go to auction.  Properties go to auction for lots or reasons including is is just faster and easier than listing a property. 

Tax sales vary dramatically from state to state and the quality of the title and type of deed can vary also.  In most cases a tax sale wipes out junior liens like mortgages.  However most tax deed auctions will require a "quiet Title Action" to give you insurable title. 

With a foreclosure auction if the first mortgage forecloses it wipes out any second mortgage or junior liens. However if you are bidding at a foreclosure auction where the second mortgage is foreclosing then the first mortgage stays in place. 

In both of the above cases the terms of the auction may spell out exactly what you are getting in terms of title. Just like you need to read the sale contract to know exactly what the terms are you need to read the terms of the auction to know what you are bidding on.  If the terms are not clear simply pass. 

As I said there are many types of auctions, I buy and sell at public auctions all the time. It is clear you are getting clear insurable title. If for some reason the owner can not give you clear title, you would get your deposit back and be under no  obligation to settle on the property. 

What you mention in RI is probably a tax lien sale. You are buying a lien against the property and if not eventually paid you can foreclose and get the property.  Tax liens are  my specialty and I buy hundreds every year.  However it is really important that you understand the laws in your state. Tax sake can be quite complex. 

If you Google real estate auctions in your state or town I am sure some auction companies will  come up. See if they have listing for public auctions that are not foreclosures or tax sales.  In my area dozens of properties get auctioned off every week just from regular sellers that just want to sell quickly.  These are done ON SITE not at the courthouse steps and you are able to go into the property and inspect them before the auction.