How to fund REO deal - Partner backed out last minute

[Farrukh Amini]

I'm wondering if anyone has experience with a money lender or other ways to finance an REO that could help me close on this delicate all-cash deal. It's all cash because, for some reason, this bank said no to appraisal contingency from the hard money lender, so we're funding this all cash. Our offer is almost accepted - we're negotiating the closing date at this point, and all of a sudden my partner got cold feet and backed out last minute (The partnership was he brings the capital and I put in the expertise and the work and we split the profits 50/50). I understand him because this is a risky deal, but the return is great too. Below are the details:

Type of property: 2 bedroom condo (850sq ft) in a 5 unit B class building with dedicated parking. 

Location: Jersey City, NJ (in a very desirable neighborhood)

Seller: Bank Owned

Asking price: $200k

Negotiated price: $150k all cash (that's how much the partner had besides the reserved $20K that we planned on using for repair and resolving HOA arrears issues - explained below).

ARV: $300 (recently sold and currently listed comps range in $280-$400k based on size and condition and other factors).

The main issue: The main reason this property hasn't sold was due to HOA arrears. The previous owner of this condo who got foreclosed on stopped paying, including her dues, causing the entire building to stop paying HOA fees. Now everyone owes in arrears. The former head of the HOA association who's one of the apartment owners is not being cooperative to release any details regarding HOA financials. Based on my tax research and talking to another tenant I estimate $6,400-$10,000 owed in arrears for this unit. With legal fees and rehab, I'm estimating an additional $20k to make this property appealing to a buyer that uses conventional financing.

Potential: If acquired for cash, can finish the rehab in 2 weeks and rent it out for a minimum of $1,800/month (minus roughly $700 in taxes/insurance/HOA) which can generate an approximate positive cash flow of $1,100 while working on resolving the HOA stuff. Once fully resolved, can sell for $300k+.

My challenge: No conventional bank would loan to a borrower unless those issues are resolved. The only options are either a hard money lender or all cash. The bank doesn't want an appraisal contingency, and the two hard money lenders I've been in contact require an appraisal. Now the partner that originally agreed to fund the deal backed out. Need to find funding by Monday or Tuesday because the counter offer went back to the seller on Friday. 

Any advice and input are greatly appreciated. I have no prior experience with REO or cash/hard money financing.

[Adam Gollatz]

You should be able to get the appraisal done quickly, 1-2 days, so check with your HML and see. Then you would write an offer with a 2 week inspection contingency, no right to cure and if the appraisal comes back low you can walk away.

My advice on this deal is walk away. HML works great when traditional financing wont do because of property condition, because you can always throw money at the problem to fix it. Fixing a broken condo association is a different story.

[Thomas S.]

I would walk away from this deal, too high risk especially if you get stuck long term with a rental having negative cash flow. $1800 on a 300K property is not a worthwhile investment risk. This will not be a positive cash flow investment.

If you had your own cash going in to cover all costs that would be a different story but considering you have no skin in th egame you are also too high risk.

[James Wise]

Originally posted by @Farrukh Amini:

I'm wondering if anyone has experience with a money lender or other ways to finance an REO that could help me close on this delicate all-cash deal. It's all cash because, for some reason, this bank said no to appraisal contingency from the hard money lender, so we're funding this all cash. Our offer is almost accepted - we're negotiating the closing date at this point, and all of a sudden my partner got cold feet and backed out last minute (The partnership was he brings the capital and I put in the expertise and the work and we split the profits 50/50). I understand him because this is a risky deal, but the return is great too. Below are the details:

Type of property: 2 bedroom condo (850sq ft) in a 5 unit B class building with dedicated parking. 

Location: Jersey City, NJ (in a very desirable neighborhood)

Seller: Bank Owned

Asking price: $200k

Negotiated price: $150k all cash (that's how much the partner had besides the reserved $20K that we planned on using for repair and resolving HOA arrears issues - explained below).

ARV: $300 (recently sold and currently listed comps range in $280-$400k based on size and condition and other factors).

The main issue: The main reason this property hasn't sold was due to HOA arrears. The previous owner of this condo who got foreclosed on stopped paying, including her dues, causing the entire building to stop paying HOA fees. Now everyone owes in arrears. The former head of the HOA association who's one of the apartment owners is not being cooperative to release any details regarding HOA financials. Based on my tax research and talking to another tenant I estimate $6,400-$10,000 owed in arrears for this unit. With legal fees and rehab, I'm estimating an additional $20k to make this property appealing to a buyer that uses conventional financing.

Potential: If acquired for cash, can finish the rehab in 2 weeks and rent it out for a minimum of $1,800/month (minus roughly $700 in taxes/insurance/HOA) which can generate an approximate positive cash flow of $1,100 while working on resolving the HOA stuff. Once fully resolved, can sell for $300k+.

My challenge: No conventional bank would loan to a borrower unless those issues are resolved. The only options are either a hard money lender or all cash. The bank doesn't want an appraisal contingency, and the two hard money lenders I've been in contact require an appraisal. Now the partner that originally agreed to fund the deal backed out. Need to find funding by Monday or Tuesday because the counter offer went back to the seller on Friday. 

Any advice and input are greatly appreciated. I have no prior experience with REO or cash/hard money financing.

 Don't be in a rush to put something together is the cards aren't in the deck. Remember a bad financing package can turn a good deal into a crappy deal real quick.....Take a step back, stack more cash & gear up to get back into the ring when you're not undercapitalized. There is always going to be another deal.

[David Lichtenstadter]

In what area is the property ?

[Farrukh Amini]

Originally posted by @David Lichtenstadter:

In what area is the property ?

It’s in the heights.  

[Jay Hinrichs]

Originally posted by @Thomas S.:

I would walk away from this deal, too high risk especially if you get stuck long term with a rental having negative cash flow. $1800 on a 300K property is not a worthwhile investment risk. This will not be a positive cash flow investment.

If you had your own cash going in to cover all costs that would be a different story but considering you have no skin in th egame you are also too high risk.

a dysfunctional HOA in our country is a HUGE Red FLAG ... irrespective of the ( is it a good deal for cash flow equestion)

[Farrukh Amini]

Noted. Thank you for your input @Jay Hinrichs and others. It seems to be the consensus. I’ll leave this one alone. 

[Jay Hinrichs]

Originally posted by @Farrukh Amini:

Noted. Thank you for your input @Jay Hinrichs and others. It seems to be the consensus. I’ll leave this one alone. 

Red Flag means further due diligence Is required... not that's it a pass.. However if the HOA wont give out financials I Personally would be very careful

[Ahmed Saad]

If other units are in arrears for HOA dues you will have a lot of trouble selling the unit because traditional banks will not finance a condo if management has not collected enough reserves. Even if you don't want to sell the unit if you were to buy it, other owners who want to sell will have the same trouble.