What loan product should I chose for this deal?!

[Eric Telese]

Hi all,

I am hoping to be purchasing a neighbor's house within the next 2-4 months or so. I should be able to get a very good price for the area because of the relationship with the seller. I hope to get the house for $300k. This property is a complete gut-job and will require ~$150k rehab for a total project cost of $450k. The ARV will be $550k at the minimum. I am hoping $600k but am using $550k as the conservative number for my analysis. The property is in NY.

I originally was just going to flip the property and dump the proceeds into more buy & hold where we currently invest in the Atlanta area. I don't currently own a primary up here so I changed my plan to flip and to make this my primary/starter home.

My goal is to stay as liquid as possible and use mostly outside funding for the project. I have a few options here and not sure which I should chose:

1- Purchase the property with conventional funding- 30 yr fixed. I can put as little as 3.5% down at the cost of a small $110/month PMI payment. The monthly payments would be low. Use private money for the rehab and then refinance into a new 30 yr fixed. I would pay off the private lender and pull most of my money out and have a higher mortgage payment but at the cost of minimal money down. I would also have two closings here.

2- Purchase and fund the rehab with hard money, then refi into a 30 yr fixed. Most of the lenders I am talking to are 12% with 2-3 points. Most of them also want at least 15% of total project cost so I would need to use more of my own money on the front end, but then pull it back out after the refi. There would still be two closings here as well so I think the total costs here would outweigh option 1.

3- I have just started looking into construction/rehab to permanent loans. One of the lenders I am talking to will lend up to 80% of the total project cost so I would again need to put up a lot of my own money here. It would be interest only during the rehab period, and then convert into a 30 yr fixed at a low interest rate. I like the idea of this loan but I  would need to leave most of my own money tied up in this deal until refinancing with someone else. This loan type seems like it would be a pain to go through with all the different requirements.

4- I don't believe seller financing will be a possibility at all.

I would love to hear any other creative financing ideas that I am sure you guys have! Thanks in advance for any advice here.

Eric

[Account Closed]

Hi Eric,
You may know some of what I'm going to post here already so bear with me if you do.

Option one: You would need a true private lender (a local guy willing to take second position) to do this. Also note that with low down payment financing, the property would have to pass a fairly stringent FHA inspection first (meaning no health and safety issue showing up on the appraisal). A conventional lender (higher down payment) would be a little more flexible but still want the property to be pretty much occupyable as is. I mentioned this as you said the house is a gut job.

Your second example: That would work but remember that if you take cash off the table on the way into the long term money the loan will be considered a cash out by the new lender meaning, you'll take a rate hit and a LTV hit (a LTV hit might mess up the loan to value ratios and kill the loan too). If you just get enough to pay off the rehab loan, the conventional lender will likely be a bit more liberal on LTV and a lower rate. The rates you are being quoted are not too terrible. I can point you in the direction of getting 100% of the rehab financed, getting first draw at closing, and a payment free rehab loan if you are interested.

Example 3: Construction to Perm works but typically, lenders will make you jump thru a lot of hoops during underwriting. They may even require your engineering and architect drawings before closing on a project of that size. And yes, the long term money will cost more than otherwise necessary.

Since you personally know the seller, Would he be willing to QCD the property over to you (that you don't record), Setup a contract for deed dated 6-9 months in the future that you do record, take over the payments during the rehab project funded by the local guy in second position, and then buy the finished house from him with the 3% money and pay off both of the other mortgages?