How does this work?

Question

So, what I'm finding with hard money (still having trouble finding private money) is that many HML will lend up to about 65% of the PURCHASE price of the property (not the ARV)... leaving the purchasing investor to come up with the other 35% plus repair funds.

But what if I truly do not have any money?

Do I find a 2nd lender to cover the 35% and repairs?

How have you done it or how have you heard it being done?

But what if I truly do not have any money?

Do I find a 2nd lender to cover the 35% and repairs?

How have you done it or how have you heard it being done?

Jon Holdman · Answer

I'd keep searching.  Lenders exist that will lend based on ARV.

Private lenders are people you know with money who will lend it to you.  Just keep talking about what you want to do with everyone you know and everyone you meet and eventually you'll find some people.

If a HML's on his or her game, they will put a clause in your note that forbids any additional loans against the property.

Account Closed · Answer

Fix and flip would be a tough game if you don't have any cash of your own.

I suggest that you wholesale or buy subject to, or do something else in real estate to generate some cash. Save that cash up until you can afford to fix and flip.

You are going to have a hard time finding any lender who will give you any money, based upon any set of figures, if you are not putting some of your own funds at risk.

Unless, of course, you have a history with that lender and a very good history of making serious money on your deals. For a newbie with no track record and no cash? You are going to have problems borrowing $, unless you have a huge income and excellent credit. And if you have a huge income, why haven't you been able to save any up?

Jon Holdman · Answer

Interesting.  That's not the case elsewhere.  I'd have to say that may indicate HMLs in CA think prices are going to fall and want to be sure you have enough skin in the game to cover the potential price declines.  I'd take that as a strong hint you really need some deep pockets to jump in.

Jeff Linder · Answer

I'm not understanding that theory.

Let's say the ARV is $400k.

Purchase price is, say $250k.

and repairs are $50k.

The 65% loan on purchase price would be $162,500

Still don't know where to come up with the $50k for repairs or the additional $87,500 (difference between loan and purchase price)

Jeff Linder · Answer

James and Jon, thank you for taking time out to respond to this.  I appreciate it.

You both kept referring to the HML loaning based on ARV.  That is not what I am finding here in Ca.  Every single HML I've contacted loans based on purchase price, not ARV.

James Harkness · Answer

I think that if you find a good deal, the ARV would end up such that the hard money will cover your purchase price plus repairs.

Jon Holdman · Answer

If a lender will loan based on ARV, there won't be the 35%.  Here's an example:

ARV: $120K - determined by lender's appraiser
65% of ARV: $78K - this is the maximum loan amount
Purchase price: $50K
Rehab costs: $20K
Points on loan: 4% = $3120
Loan proceeds: $74,880

So, in this case, the net loan amount covers both the purchase and the rehab costs.  Rehab funds are typically held in escrow by the lender and only released to the borrower as the work is completed.

There will also be closing costs, maybe $2000 in a case like this.  There will be inspections (if you choose), insurance, and potentially other charges you might have to pay up front.

Once you buy it, you'll typically have to make monthly interest payments.  Assuming 15%, you'd be looking at $975 a month.  You would have some other small bills, too, like utilities.

You would typically have to front money to your contractors and for materials, do the work, then get reimbursed for your repairs.  So, you'll need some cash or credit for that.

Then,when you sell, you'll have a bunch of costs on the back end.  Say in this example you sold for $120K. You'd pay 6% in commissions ($7200), 2% or so in closing costs ($2400), and these days another 3% in seller concessions ($3600).  Total costs of $13,200 for net proceeds of $106,800.  You pay back the $78K loan, leaving you $28,800.  If you've managed to stay on budget with repairs, and held for six months, you've probably put in another $3000 of your own cash into this deal.  So your profit is about $26K.  That would be a very good deal.

Its very difficult to get into the fix and flipping business if you don't have some of your own money or money from somewhere else.  Credit cards, friends and family, HELOCs on your other property, etc.

James Harkness · Answer

If they are lending on the ARV, you will get 65% of 400k, which is 260k.  So in your scenario, you would be out of pocket 40k, not 87.5k.  If you find a good enough deal, you should be able to purchase for 70% less the cost of your repairs.  That is a typical rule of thumb many investors use.  I believe that there are hard money guys who will do 70%.

Jeff Linder · Answer

I am definitely still talking with everyone and continuing my search for private money.

Jon, so let's say I DO find a HML that look sat the deal and loand based on ARV.. there is still that 35% and repair costs.  Do most investors, that go this route, tend to get private money to cover that portion?

How does this work?

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