Money for rehab included in loan?

Question

If I want to buy a home that is let's say 180k but I know the home will need work done...do you get a loan for higher than the amount of the house or is all rehabbing out of pocket?

Mark Simpson · Answer

Hi Blake, I'm Scott's partner and thought I would throw my 2c in.

First off, the loan you are asking about is called an "FHA 203K".  You must be an owner occupant, but can get draws for rehab costs etc etc with potentially as little as 3.5% down.  There is a ton of paperwork and loops you will have to jump through.  If you have a great deal and no source of family or private money then it will allow you to get the job done.  Fair warning - I have no personal experience of using these loans, just know what I know from word of mouth.  I'm sure there are plenty of threads on the program, otherwise google can fill in some blanks.

As for the deal.  I only see two options that you could be talking about (unless you have something off market).  In any case I'll detail them for the fun of it. 20748 Hwy 550 and 1416 Aspen.  Both in my opinion are terrible options.  The first DOES NOT include a 'small amount of land'.  It's a space in a park.  If you want to buy a home to put in a park, there are much cheaper options out there. They might not be 2015 but they're also not single wides.  As for Aspen Dr, its 1972.  To qualify for FHA it needs to be built after June 15 1976.  Finally for the remodel.  Scott and I have done very well remodeling double wide manufactured homes.  We have taken 2 single wides to the dump... they are VERY different 'homes'.  We have however never done an addition to these.  The problem is they are almost always 2x3 walls, with 1/4" drywall.  They are built at the minimum snow load for exterior walls.  If you were to blow out a wall to add square footage, the original wall would not be designed to hold the extra roof and walls attached - if not done properly it would potentially jeopardize all future financing.

Long story short IMHO as you pondered in your last post, it may be best to keep searching.

Feel free to reach out to Scott or I.  Given your sub 200K budget, IMHO your best opportunities lie in Montrose or further North.  More options and 'learning' is less costly.  That doesn't necessarily mean you can't live in Ridgway.

Good Luck!!

Jon Reed · Answer

You can also look into commercial construction/renovation loans. My current deal is financed at 80% of purchase price plus 100% of renovation costs.

So I put down $10K for a $50K home and the bank is financing 100% of the $30K renovation cost. The home appraised for $110K so I was able to purchase the home for only 11% of the home's renovated MV.

David Kazarian · Answer

@Blake Hrabal

If you are doing what Jon is suggesting you are getting into hard money. Hard money is based on experience along with credit and property. When you do 20% down & 100% rehab you will typically pay the quoted interest rate stated for 1 year. After that you will need to refinance. The money for the rehab is not available in one payment. You will set up draws with the lenders based on % of completion.

You should be aware that you will need to show the lenders cash on hand to make the interest payments. You can't just finance the property with 20% down and have nothing in the bank. They do look at personal financial statements to see how much money you have to make those payments.

Hope this helps. Best of luck. If you have more questions feel free to DM me.

Scott Elkins · Answer

Blake, HI, I am a western slope local also, with about 70 regional flips under my belt in the Telluride Montrose to Delta region.  Yes, Ridgway is very expensive, also Modulars/Mobiles don't appreciate as well and its harder to lend on them, especially if they are older. The lending is a barrier and limits your exit and buyers pool . Lots of rules in general for flips and even more so for mobiles.  Most folks in the region, just get in on the cheapest thing and hold on for appreciation but you can add equity as you stated quicker if you can add value/size/income etc .

Shoot me a DM and we can chat. happy to give you any input you seek, its fun to have more investors out here in the "sticks".

@Mark Simpson

Odie Ayaga · Answer

Your question is a little more complicated than you probably think which is not unusual for new flippers. What @David Kazarian mention covers some salient points, but is not all encompassing. Credit, experience, and property are generally the most important factors. After that, however, a lot differs from lender to lender. If the property needs rehab then it's typically included with the loan. Sometimes you pay interest on it the whole way and sometimes only as you take draws out. You'll typically pay up front and get reimbursed from your loan, but some lenders will front you the first draw at closing. Some lenders won't finance a trailer/modular purchase. If you don't already have one I would start by determining and/or shopping for your contractor(s). You'll want to know how much the rehab will cost if you aren't experienced in that field alone. If you know one that you are close with, partnering with them may strengthen your position for a loan.

Jennifer Stradtman · Answer

If it appraises for more than you’re paying you may be able to get some rolled in,  But, if not, it’s out of pocket. There is that 20% issue for investment properties - at least that’s what my bank requires in equity.

Mike Miller · Answer

Try a local bank. I just did a refi/rehab loan with one in my area. They paid me my purchase price plus 100% of the rehab cost. Interest rate is 5.75%, 5 year ARM, 20 year loan.

Blake Hrabal · Answer

Thanks for the response guys. So it sounds like for a first time home buyer....i should try to find the best deal on a house that needs the least work. Sounds like rehabbing a kitchen/bathroom, knocking down walls, and adding on rooms will come later down the road when I already have established equity to use towards paying on the rehab. Am I on the right track here?  I'd rather pay less for the first home than have to come out of pocket for renovations.

The reason I asked this is because there is a 3b 2b for a decent price in Ridgway where I live...now it's typically rlly expensive here....the 3b 2b that popped up is a trailer/modular home on a small plot of land. I'm thinking we can sacrifice some space, to own a home in ridgway, and my initial thought was...well since the home is cheap, I can take out an extra 20k-30k and add onto this home so it's a 4bed with some more space for my family.

However, if it's going to take some hard cash or some already established equity to renovate right from the start, it may be best to continue looking for something that is basically move in ready.

Money for rehab included in loan?

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