Personal Loans to purchase foreclosures...your thoughts?

Question

Hi there,I was chatting with a friend that I plan on partnering with in flipping houses with (in DFW, mainly Dallas/Far North Dallas areas) and she brought an idea across - to purchase foreclosures with a personal loan rather than seeking a mortgage. She detailed a few benefits, one being less hassle during the approval process and there would be enough funds to cover the cost of the homes that we're looking to buy...one disadvantage I noted was the interest rate of the note, it's for sure going to be higher than that of a bank mortgage (assuming we get a good rate). I wanted to ask the opinion of experience investors, would any of you recommend doing this?

Hattie Dizmond · Answer

@JoJo Diego If you can qualify, I love the idea. It eliminates the hassle of things like appraisals and condition factors that may prevent a mtg company from approving a mortgage on a distressed property. Personally, I'd treat the personal loan like a hard money loan, use it to purchase and rehab, then refinance with a mortgage, if you plan to hold the property as a rental. Otherwise, just make sure there is no pre-payment penalty. If you can get the personal loan as an unsecured LOC, that would be the best case scenario.

John Hamilton · Answer

I know the bottom portion of my post is a little off topic, so use whatever is available for you at the time. Consider your loan maintenance and fees, also save a little for holding and closing since you will have to do 2 closings. About 20% should cover it. Also, I would calculate 70% ARV as your total costs, just to be safe, unless the market demand is screamin hot and you can bank at reselling at 80% - 90% ARV. Look for a buyer as soon as you purchase.@JoJo Diego Find a rehabber or GC to JV with you for your first deal. Get a few quotes, too, doesn't hurt. If he doesn't do the work and do it right, he don't get paid. Protect yourself by buying the material with him (not him on his own with your checkbook in hand, don't even trust receipts). You can agree to pay him AFTER he has completed the job per phase/job or accept a certain share of the profits (33% since you and your friend each get 33%). Of course, he may insist that he get 50%. That depends on how much work is needed and how fast he can get the job done. Maybe offer him more of a percentage over 33%, IF he can keep the costs low and perform quickly.In paying for labor, say your rehab consists of kitchen cabinets and appliances, bathroom rehab (tile and fixtures), flooring and walls with some electrical/plumbing work. His bid should indicate how much each job costs for both labor and materials. Pay him off as he completes each individual job. Unless you are doing the equal split. Good Fortunes to you

Copelon Kirklin · Answer

@JoJo Diego The only issue I would have with using a personal loan is that I would be the guarantor. Hard money makes sense in these types of scenarios because the property would be guaranteeing the loan. This is why you hear of investors using hard money more than personal loans. But one caveat to hard money is that there are very few TRUE hard money lenders existing today. True hard money lenders (like before the '08 financial crisis) did not take income or credit into consideration, only the property. You'd be hard pressed to find many of those lenders in the market today. But there are a few there. I know of one personally. So, you definitely have options. It's just more so of which option best fits your investment strategy.

David Taylor · Answer

@JoJo Diego If you use a Hard Money Loan, which most investors use to buy and rehab, personal loan can be cheaper (my credit union Alliant starts at 12%).If you get a mortgage, then the mortgage option will be cheaper. If you are doing a minor rehab consider Homepath if the rehab is less than $35,000.https://www.homepath.com/financing.htmlIn your state, you can also use Homesteps for financing but I am not sure what they offer for rehabs.http://www.homesteps.com/homesteps/financing/index...Good Luck,Dave

Rolanda Eldridge · Answer

It's definitely an option, but make sure you have a good exit strategy or options if resell doesn't sell quickly...payments, holding cost..

Marlon Freeman · Answer

I'm sure others will chime in here, but I'll give my 2 cents. Since you're flipping houses, that may not be a bad route, because it will make you a little quicker on the draw for purchases. You obviously want to be aware of all of your holding costs, so with a higher interest rate, will increase that some. The flip process usually can take a few months to complete, so be prepared to make payments with that increased interest rate. Will the personal loan cover the purchase AND rehab? Will both of you obtain a separate personal loan, or one loan as a team? Are there any restrictions on using the personal loan? Some lenders may have restrictions on such money. Is it a personal loan from a bank, or private lender?

Wilson Churchill · Answer

Don't forget to factor in closing costs when determining total costs. I don't know what the fees are for personal loans, but securing a mortgage will likely cost at least a couple thousand in closing costs. Credit cards are the best option, in my opinion. You can get 0% for 18 months with a 3% fee. Some cards even offer no "balance transfer" fee. I put balance transfer in quotes, because you can access balance transfer funds using checks. Deposit the checks into your account and use the cash to buy a cashiers check for the closing.

Bob E. · Answer

traditional mortgage would probably be hard to get when purchasing flips because of the amount of work needed a lot of the homes won't qualify.

Nilesh Makhija · Answer

@JoJo Diego - It would be good if you can share the detailed numbers. The reason is something may work for you while it may not work for others, so detailed numbers will help to support an opinion. I agree personal loans are at high interest rates, but at the end its all about the money and how much you are making out of it.Personally, I would have gone the mortgage route, but that does not mean anything to you unless its in right context.

Wayne Brooks · Answer

The foreclosures you look at may not qualify for a traditional mtg anyway. The personal loan/private money, etc. is intended to be short term, so if you're keeping it you'd refi out after the property is repaired. This assumes you'd qualify for the mortgage. A note of caution: a "personal loan" is much harder to get, since I am assuming there would be no mtg on the property, or security for the loan. Make sure this friend is talking about a legit source for this personal loan, and not some "give us a $1,000 application fee and we guarantee we can get you a loan" scam.