203k Loan + Private Money for a Deal, Seller Believes It's Fraud?

Question

Hey BP and Happy Friday!My husband and I are in the process of buying our second small multi-family here in Long Beach, CA. We have our eyes on a duplex in Long Beach that will have room for our growing family plus great rental income. We would use a 203k loan due to amount of renovation needed on both units. We're approved for $875k (without selling our current triplex for more capital) with this kind of loan. The property is listed for $849,000 and it's been sitting on the market with investors backing out of it and no one else offering anything. What we offered is $875,000 using a 203k loan. The units require $200k of renovations so the sellers would pocket $675,000. To help them net more money (and frankly take our offer), we also offered an additional $100,000 from a private lender to be wired in when we close plus give them my buyer's agent commission since I'm a full time Realtor. In total, the sellers would net about $790,000 before commission and escrow fees. What we would do is renovate both units and refinance out of a 203k loan and pull out $100,000 in equity to pay back the private money lender plus 10% interest after 6-12 months. A BRRR method, if you will. The sellers don't want to take our offer because they suspect taking additional funds along with an FHA type loan is "fraud"? I'm not sure how to answer them on that and what points to make to put their minds at ease. We really want this house...we have baby #2 coming in summer time and our triplex just doesn't have enough room so we need another home. Any guidance in my answer to them is greatly appreciated! Thank you so much.Blessings,

Wayne Brooks · Answer

@Lindsey Iskierka So you understand:Fha will lend up to 96.5% of the Finished appraisal value...they are your best bet. If purchase price and rehab don’t fall below the Finished Appraisal, it’s no deal to begin with, and a Huge mistake.HML will not and can not lend on an owner occupied, period. A “private lender” might, but in either case; 1) neither one is usually foolish enough to lend money on a second, behind an fha loan, to at or above appraisal. 2) FHA will Not allow the second mtg.Either the seller sells at a price that combined with the renovations falls within the Finished Appraisal price, or they don’t.....nothing else makes sense.

Kyle J. · Answer

Very few, if any, hard money lenders will lend on an owner-occupied property. Most want to lend to an LLC, only on non-owner occupied investment properties, to avoid issues with Dodd-Frank.

Lindsey Iskierka · Answer

@Chayson Descisciolo We’ve definitely considered hard money for the remainder of the renovation to be able to offer more to the seller upfront. My concern is if the 203k consultant/contractor who will be assigned to our project would allow just half of the renovation done. Just $100k might not make the units livable. I know they’re pretty strict so I’m just wanting to make sure that the loan goes through and we don’t cause hiccups by using hard money or private money for a portion of the rehab.

Chayson Descisciolo · Answer

@Lindsey IskierkaSounds like there's a lot of confusion here. I'm not going to comment on the fraud part, but I think the offer isn't being conveyed correctly. It sounds like you're approved for a loan of $875k, but if $200k is earmarked for reno then you're really only offering 675k. Why not just offer $775k, build 100k into the 203k loan renos, then use the hard money for the rest of the reno? Same outcome but now seller doesn't need to worry about taking additional funds?

Wayne Brooks · Answer

Agreed, either You are confused or explaining it poorly. If you “offer” $875k, that’s what the seller gets....not that minus the rehab amount. Your offer is $675 to the seller, you borrow 96.5% of that and the rehab. And, you will never get an additional $100k loan on top of it. Also, extremely unlikely you could refi after 6-13 months and pull out that extra $100k.

Rick Pozos · Answer

I think you might be confused how the 203 works. Or maybe I am confused on how or WHY you are trying to explain to the seller.Basically you are offering the seller 775k. You are going to get a loan for675k and 200k for rehab. And a friend is going to throw in 100k as your down payment. I think that is what you are saying, right?The seller does not have anything to do with your private lender or your refinance of the deal. They are going to be out of the situation when you close on the property. I think you are trying to tell the seller too much and you are confusing them. Talk with the sellers agent and t-a-l-k s-l-o-w-l-yLet the seller know their bottom line dollar amount, thats it.

Lindsey Iskierka · Answer

Thank you for the reply! I will talk to our mortgage lender but I've been upfront with him on what our plan is for this home and he didn't mention anything about fraud. I'll continue to look in to how to do this in a way that is legal and works for all parties. I just figured the BP community could have some insight.

Jay Hinrichs · Answer

talk to a mortgage broker.. / RMLO they will know.. and careful on the mortgage fraud it is a felony.