Hard Money

[Bryan Ellis]

So I'm feeling fairly frustrated with hard money at the moment. Does anyone have an experience with a lender that actually returns phone calls and gets back to you? I'm finding that there are so many that just ignore phone calls and at least one of them has sold my information to spammers. So far its a very frustrating process so I'm looking for any advice on good hard money lenders (that work in PA)

[Jon Holdman]

How much of your own cash do you have in this deal? Assuming the $175K number is accurate, I would want to see you have at least $17K, and would be more comfortable if you had $25K to be sure you could complete the deal.

Assume a HML will do 15% and 4 points, 70% LTV. Assume the $175K number is verified with an appraisal by the HML's appraisal. Closing looks like this:

Loan: $122,500
less Points: $4,900
less closing costs: $1,900
less repair escrow: $25,000
less purchase price: $95,500
cash needed from borrower: $4,300

You would also need to pay for insurance, inspections, and who knows what else. Given your strategy, you would need at least vacant house insurance, or better, builder's risk. Figure $1500 for a three month policy. $500 for inspections, $500 for an appraisal. Assuming no other fees (and there's always something else), you need $6,800 at or before closing.

Now, if you convince me you know what you're doing, maybe I give you a chunk of that repair money up front. So, say you get 25%, 6,250. That brings your cash at closing down to $550.

Now, you're going to make monthly interest payments of $1531.25. You're going to have to pay your contractors and buy supplies. I'll inspect the work, and as it progresses, you'll be able to get draws from the remaining repair escrow. Assuming the repairs really are $25K, and you got 25% up front, you will need the $25K for repairs, 2.5 (75 days of payments), and utilities and anything else to get the fixup completed. Assume you start marketing it right away, get a buyer in a month, and close in another month. That's a total of 4.5 months of holding time. So, that looks like:

Interest: $6890
Repairs: $25,000
Repair escrow: $-18,750
Insurance: $1500 (a second three month policy)
Utilities: $450 ($100/month)
Total: $15,090
Plus the $550 at closing and we're at $15,641. See how I got up to that $17K I mentioned at the start.

Now, that assumes nothing goes wrong. Things always go wrong. You'll spend more on the rehab than you think. It will take you longer that 4.5 months to close. You'll sell for less than $175K. You'll have to give some seller concessions. Maybe all of those. That's how I get up to that $25K number.

Now when you sell, you get a bunch of this back. Assume 6% for commission, 2% for closing costs and 2% for concessions and you net $157,500 on the sale. Pay off the $122,500 and you're left with $35K. There's some tax on that, but only on the gain (profit), which is about $19K. State, plus local, plus (maybe, CPA time) SET. Assuming 28% federal, 3% PA, and avoiding SET, you have a $6K tax bill, leaving your after tax profit at $13K.

Are you able to convince a HML you're able to bring your part of the cash to the table?