Okay Hard Money and Private Lenders! What would you say to me??

Question

Allight then everybody.  I have a lead on a deal for a rehab and sell project.  I could also rent it out as a second exit strategy.  Some of this is hypothetical, and some is based on a property I am researching.  I would like to know what I can expect if/when I would go for a HML.  Please be honest, and constructive.  If you would not loan to me, please let me know what I can do to to improve my chances.

This isn't a specific request for funding.  I am just looking at what I should be prepared for.

First, the property:

2/1 Twin 936sq ft

Radiator heat

No A/C at this time

Purchase price:  $20,000

Rehab Costs:  $35,000 (hypothetical,  I am assuming one major repair on top of cosmetics)

ARV:  $95,000

Rehab costs are inflated.  Based on pictures, it is mostly cosmetic stuff, and my partner thinks 15-20k should do it.  I am overestimating.

ARV is conservative. Comps in this  neighborhood would be around $110,000 at this size.

This would be my first flip.  My partner will do the rehab and sub out any necessary jobs.  (Electrical, etc.).  Our partnership is 50/50.  I am responsible for finding properties, negotiating, and financing.  Basically, I am the "face" of the partnership.  He will take care of the rehab.  As such, our rehab costs consist of supply costs.  He will be paid when the house is sold.  He has a history of flips and rentals, but has been out of the game for about 3-4 years.

So, those are the numbers and I come to you as a first-timer looking for financing.  My credit score is 700 on the nose. (Damn you ex-wife!).  Based on these numbers, if you require out of pocket money, it will come in the form of a 401(k) loan, which I would repay after I sell.

How does it look for me as I search for funding?

Jon Holdman · Answer

It sounds like you've yet to have a look at this house in person.  That's key.  Go have a look.  Better yet, take your contractor with you and get a bid for the work.

When looking at comps its important to do two things.  For one, understand how appraisers make do their math and make adjustments in your area.  For instance, ground floor footage is worth the most, second story maybe half, and basement maybe 10-15%.  So, when comparing comps, be sure you have the same style and location of footage.  A 2000 sq.ft. ranch with no basement is worth a lot more than a 1000 sq.ft ranch with a 1000 sq.ft. basement.  When making adjustments for size, the appraiser will look at recent sales, then use a third to half of the $/sq.ft. sales price to make the adjustment.  That's because bumping out a wall a little and adding footage is a lot cheaper than getting to that wall in the first place.

Second, you want to see ALL the comps.  Not just a subset.  That's becuase you cannot control which one your buyer's appraiser will choose.  You can always cherry pick comps and get a high number or a low number.  But the ones the appraiser picks are the ones that matter.  So you need to know what's lurking out there that might trip you up.

Chris Haas · Answer

Jason, also being local of the reading area, the ARV sticks out as being very aggressive. If you are talking about a property in the city, I would be even more skeptical of the ARV.  That said, I would love to hear more details about your deal  and wish you the best of luck.

Timothy Tooker · Answer

If those numbers are correct, you should have no issue with obtaining a HML. They probably want you to have some skin in the game (10 to 20%). Which would make your LTV even better.

Good Luck

Jason Krick · Answer

@Jon Holdman

Thanks.  I was hoping you would respond as I always appreciate your concise and direct responses.  The numbers I put out were based on pictures only.  I realize if it gets too expensive, I walk.  Mostly, I am hoping that someone would say "With those numbers, funding would not be an issue."

I can run numbers all day, and I think there is a deal here once I dial in on them.  But, my major concern was will I find hurdles with it being my first deal, and with any out of pocket money coming from a 401(k) loan?

Am I allowed to post links from Zillow to show some comps I used?  Granted they're not ideal, but it at least gives some guidelines.

Jon Holdman · Answer

First I would say I don't believe your numbers.  $20K purchase and a cosmetic rehab with an ARV of $95K?  Even if its $35K for rehab you're at 58% of ARV.  If that's correct, that's a screaming good deal.   Not saying that's not the case, but those numbers are getting into the too good to be true range.

If a HML would give you 70% and those number are correct, you're in a very good position.  Some HMLs require minimum down payments, some don't.  Some require monthly payments, some will wait until you sell.  If your numbers pan out and you have about $10-15K of your own cash along with whatever minimum down payment the HML requires, this looks like a fundable deal to me.

Okay Hard Money and Private Lenders! What would you say to me??

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