How Do I Obtain The Capital

Question

Can someone shed some light on the details involved in obtaining a loan, be it from a bank or private lender or some other source unfamiliar to me?

Our specific situation:

Myself and two partners (one of which is already pre-approved for a loan of up to 60k, with the stipulation that the purchase cannot be for less than 50k), are currently seeking a HUD home to flip as our first project. We have a good understanding of the formula involved in deciding which house to choose, ((ARV X 70%) minus rehab cost = maximum purchase price), and we understand the costs associated with purchasing, holding and selling and have a good handle on general rehab costs as they go.

Having said all that, what is the procedure for obtaining the funds for the rehab? What are all of our options? Who do we turn to? Private lender, bank or other? What is to be expected from each and what does each expect of us?

What should we expect to have to pay out of pocket during the purchase? Or can all of these fees (inspection, closing, lender fees, etc.) be included with the loan that my partner is pre-approved for? Is a deposit and/or earnest money always required? Can the fees be covered instead by whatever money is acquired, in whatever fashion, for the rehab costs?

Also, at what point in this process is the home appraised? Between which steps? Will a lender require an appraisal prior to lending? Obviously we'll have to have all of our ducks in a row in a concise and readable fashion to present to the lender.

I myself have approximately $1,000 to play with (my very small emergency fund that I'm reluctant to touch). Offhand, I don't yet know what my two partners have, but I know it can't be much, if any. We're willing to take a pretty big hit on interest rates and points just to get this first deal under our belt. After that we'll have gained a good bit of experience and confidence and have at least a bit of seed money on hand for the next undertaking.

Lots of questions, I know. Thanks to all who took the time to read over it and even more thanks and appreciation to those who provide some insight!

David

David Corvin · Answer

Ok, still needing to cover things such as closing costs, holding costs etc, haven't found my answer for that yet, but what about a 203k for the rehab portion of my expenses? I understand that a 203k is a relatively complicated piece of work, but that it's a loan given and wrapped into the orginal loan when purchasing HUD homes for the specific purpose of rehabbing.

So, scenario:

HUD home located at a price range of 25-40k. (We've found a couple that look promising)

Closings costs at three to five points should be between 750 and 2k.

Appraisal and/or inspector: 400-1k?

Insurance: 200? ish?

Application Fee: ??

Utilities first month: 200?

And then 203k into the initial loan for the estimated 20k in rehab costs.

In my inexperienced mind, this makes for a loan of 45-60k with 1600-3500 in upfront costs and approximately 700 a month in holding costs (mortgage, insurance, taxes, utilities).

Am I still on the wrong track? Or can this be done (with hard work and luck) as I've laid it out above.. at least roughly? And can someone shed a little more light on my numbers for a scenario such as this if my numbers are off? (Where all my question marks are)

Thanks!

David

J Scott · Answer

David -

Definitely don't give up, but you probably want to investigate some options that involve partnering in some way with another investor who has cash. Perhaps start finding great deals, and offer them to another investor for a percentage of the profits. Or perhaps start by bird-dogging or wholesaling deals. Or maybe you can bring some other skill to the table in exchange for another investor funding the deal.

Just some thoughts...

James Vermillion · Answer

David, to get some other ideas and background on funding deals, use the search feature...you can find hundreds of threads about different methods to funding.

Also, work on your own financial situation as much as you are able to. Start saving as much money as you can and pay down any debt that you can, as it will pay off when you are talking to banks about funding a real estate deal.

It is good to see you are not giving up though. Take this as an oppertunity to continue learning about real estate and the market you are going to invest in.

David Corvin · Answer

Thanks for the replies guys. Disheartening for sure, but I thank you for your honest directness. I'm not even about to give up though. There has to be a way to get my foot in the door and I'm gonna find it. Tomorrow we're gonna get together & talk about everything & we're also gonna hit up a free class or two at Home Depot to learn how to do some of our rehabs on our own.

Anyway, thanks again guys!

David

Anyway, thanks again guys!

David

J Scott · Answer

It's difficult to answer your question concisely, but in general, you should expect that you'll need to come up with between 20-40% of the total cost of the purchase plus rehab -- especially if you're new at real estate and don't have a financial cushion.

Your options are generally small, local banks, private investors (generally, professionals who have cash or retirement funds they are looking to invest) or hard-money lenders (those who lend short-term against real estate but for high fees and interest rates).

But again, if you have essentially no cash and no experience, it's unlikely any of them will fund 100% of your costs for a deal...

Account Closed · Answer

For HML, it depends on the lender, but where I am, it's 3-5 points, the cost of the appraisal and survey, insurance and the application fee. Out of pocket could be anywhere from 2000 and up depending on the amount of the loan. For example, I'm about to complete a closing with a HML and my out of pocket is around 4000 for a 86,800 loan. (70% of ARV). Once closing is complete, you'll have to have money upfront for the rehab cost and take draws out after completing the renovations. I plan on doing around 10,000 in repairs with my own money, keep the receipts, the HML sends someone over to verify I have those repairs completed and I get my 10,000 back to do the next set of repairs. To be safe, I like to have 20,000 in cash to do a flip with a HML. Don't forget, you'll also have the money for holding costs: electricity, water, sewage, gas, trash, and the payment for the loan. That's another 1200 a month for 6 months which is the term of the loan, so the faster you can get the rehab done and back on the market, the better off you are. However, a lot of loans have a 90 day seasoning, so you'll have t hold on to the property for a minimum of 3 months.

A investment conventional loan is another option, but then you have to put down 20% of the loan amount, closing costs and then have to have cash for the rehabs. You'll have to have more cash on hand for this scenario.

How Do I Obtain The Capital

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