My first deal. In a bind!

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My first deal. In a bind!

Taylor Silker
Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote

I have recently finished construction on my first property at the age of 27. Last summer my sister and I came up with the idea of getting into possibly flipping a house. I live in colorado and she is a real estate agent in northern Minnesota. We decided I would come up with all the financing (7.5k) and she would GC the deal for her first time and basically do all the ground work and work on what she could. We then found a parcel of land which was for sale on the tax forfeit list for 17k. I put 2k down on the land and we found a modular house that has huge A-frame ceiling and a master loft so it doesn't look like a modular at all really. Anyways we put 5k down on the house and then went for financing. I received a construction loan for 309k which was an in house loan for this local bank that said they "stretched" the loan for us just in case. We didn't plan on spending all that money on construction with the budget we had planned but we all know how that goes. I maxed the budget but we are finally finished after 8 months of construction and having to finish the loft among other things. After all the hard work we put it on the market for a price that we know is a little high but obviously i would like to not loose money after closing costs and all that. We haven;'t had much luck on the mls so we figure we would do a little airbnb to help with holding cost. Heres the kicker. After only one week we are booked for 20 days in august and haven't had a vacant day yet since we've had it up. We will make at least 4k and our loan payment is about 1k on interest only as of now. 

Last time I spoke to the loan officer, she told me that we should sell the house cause she doesn't think i will able to switch to a conventional mortgage and keep the house. This has to do with my debt to income but my income has only got better since the start of the loan. Why the heck did she finance me for the construction loan if she knew I couldn't afford to switch to a conventional?! I spoke to another bank in the area and they said they couldn't finance me either. This house  is a potential 1.5% deal with good vacancy rates on airbnb. Is there any bank or investor out there that could finance me knowing this potential? 

As a young and devoted investor I would really appreciate some feedback and guidance on what i should do. I really want to keep this house!  Thank you all!

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Clayton Barnes
Bloomington, IN · Member since 2017 · 53 posts · 37 votes
9y
Originally posted by @Taylor Silker:

It's on the market for 348k. I need at least 330k to break even. Any suggestions on where I should price this?

I'm a newbie, but I think you're looking at this from the wrong perspective. It is unlikely that a potential buyer is interested in what you need to break even. They aren't evaluating you as the seller as much as they are evaluating the property against other available\recently sold properties. The price needs to be based on your local market. If those numbers don't work for you, then you'll have to determine your best option going forward.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    9y

    I would find a way to get out of that as soon as you can.   The bank can foreclose on you once your construction loan comes due, even if you are making payments.  Then you will be in a major hole.    Your income is higher now, but most banks are going to want to see 2 years of tax returns to be able to use that to qualify.   So, while it is great that strategy has bought you some breathing room, it isn't a long-term solution.

    1Reply
  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y

    I also know this was a horrible deal  after educating myself in the past few months. I wish I would have read Rich Dad Poor Dad before I started and not 4 months in!!

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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y

    Thank you Greg! Why do you think they stretched the construction loan for me knowing I couldn't afford the conventional? Isnt this the type of financing that creates the housing bubble?

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  • Mark Freeman
    Real Estate Investor · Clovis, CA · Member since 2014 · 195 posts · 194 votes
    9y

    @Taylor Silker

    I would work both angles - keep trying to sell ASAP and looking for long term financing.  Construction loans can get bad fast by getting called up or charging outrages fees to extend the terms for short periods of time.  Airbnb might be a good backup plan if you can find permanent financing.

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y
    Taylor Silker Just curious why does the loan need to be yours alone?? What about your sister can't you qualify together?
    1Reply
  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y

    @Ralph R. My sister does not have good enough credit or income history. She has 3 kids and is a go getter but  not necessarily on paper. I am the only one in my family with good credit. 

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  • Christina Torres
    Rental Property Investor · Chicago, IL · Member since 2017 · 17 posts · 2 votes
    9y
    I could be very wrong about this as I am just learning about REI but I'm wondering about the assessed value of the property.... if the assessed value is high enough (I believe LTV of 80%) couldn't this be refinanced to pay off the loans and turned into a conventional loan? Is it different with construction loans? If it's not different, could it be a matter of finding another lender that will let you do this? You may have done this already but I've noticed that many of the people in the BP podcasts typically go to smaller, local banks as they tend to be more flexible.
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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    9y

    @Christina Torres

    It did not appear that the problem was the assessed value but rather the ability to qualify for the loan.  On single family properties which use recourse loans, you need both to get a conventional mortgage.

    @Taylor Silker

    Banks have internal rules and rules the Fed forces on them.  Some times they do things that appear very stupid because they need to comply with some (arguably arbitrary) rule.

    Ralph R has a good idea that might solve your short-term loan issue.  Go in with your sister.   The downside, is that would effectively commit you to being an AirBNB landlord.  Do you think you would have as much success renting our place in January as you do in August?   If you think you can get strong rents year-round, this solution might buy you a few years.  If you are not sure, I would cut bait.  Take the loss.  Consider it a good education bought and paid for.   Every investor gets a life "seminar" every now and then.

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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y

    @Greg Scott I messaged a few similar hosts in the area and they were nice enough to tell me they stay booked in the cold months as well with a little price reduction here and there. Sounds like we should stay busy if we price it right. Also the loan doesnt expire until 11/1/17 and the lender said they could extend if it wasnt selling.

    Could I take profits from airbnb and us it towards a down payment on the new loan? And try to get them to extend since they extended me!!?

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Taylor Silker now I'm seeing a little clearer. If not your sister than maybe some one else as a partner?? Also asking too much won't help as the new buyer can't borrow more than the house will appraise at. Somebody like me will watch an overpriced property and after a couple months on the market knowing you are making payments with no tenant I might make a lowball offer. Lots of people watch the length of time on the market hoping to find a distressed seller. You will lower your payment by increasing your down pmnt. The lower your loan payment the higher DTI you can have. you didn't qualify for the loan at a lower owner occupied loan than another tho tougher option maybe is buy the loan down with a higher down payment. You may also try a less regulated portfolio or commercial loan from a local smaller bank or credit union. You would need 25% down for this loan and that might be tough. They don't have all the Fannie Freddie rules to follow Remember at all times whatever you decide your first loss will be your best (cheapest) loss. If your going to take a bath take it as early as you can. The other thing is your best asset as an investor is your credit. Try to keep that as intact as you can. That's more important than making any money here. If you can sell and come out even do it before your credit is at risk. Remember also home sales drop off in November. (When your loan is due) And around the holidays and for some places after school starts. While my heart aches about this situation it is a lesson you won't easily forget. I lost money for several years when I started out. It gets better as you learn. RR

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  • Christina Torres
    Rental Property Investor · Chicago, IL · Member since 2017 · 17 posts · 2 votes
    9y
    Greg Scott that makes sense, thank you! I think this just clicked for me- it's the person that the banks look at rather than the cash flow from the property as they would if it were commercial RE. Putting two and two together, thank you! Taylor Silker best of luck, I hope this turns out well for you and your sis!
    0Reply
  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    Ralph R. Why would I accept a low ball offer if this is bringing in an extra 2-3k a month cash flow? Shouldn't I do anything I can to keep this? Doesn't this prove the property could be valued higher? I guess it comes down to either finding a financial partner or coming up with enough for the remaining balance of what I cannot get financing for. Could be 25k. I could damn near make that if I can keep 0% vacancy in the next 4 months.
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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Taylor Silker   IF = the biggest word in the English language. I wasn't trying to tell you to sell or keep it either way. What I was trying to point out is the picture your showing potential buyers. Your original post said the property was priced high.   I don't know your market but in my market an overpriced property doesn't sell well. I'm guessing an overpriced property in your market won't sell well either. Part of the reason it won't sell as fast is it may not appraise well enough for a buyer to get financing.  That tells me the property may sit on the market a long time. For people who watch the listings this is an indicator of a distressed property. This is going to trigger buyers that are looking for a bargin and could effectively lower the dollar amount of the offers you recieve. If your going to keep it take it off the market. If your going to sell it price it appropriately. Leaving it on the market overpriced is hurting your sale ability. People will assume something is wrong with it because it's been listed for a long time.   By all means keep the property as long as you can if you want. If you are short 25k and can make it before they call the note due great. Wats your exit strategy going to be if you need to sell fast in October?  Investing is being able to asess risk to gain. By your OP you have $309k plus out of pocket expense in the thing.  in order to make a rental most people would want around 1% rent or $3,100 dollars a month. You are close here but Without all your numbers there's no way to tell what you are making.  Plug your rents and ALL your expenses into the rental calculator here on BP I doubt if you are cash flowing near 2-3k.   RR

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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    Ralph R. You are definitely right about the sale price. I shouldn't have started so high but it's honestly hard to compare new builds in the area when there is nothing to compare. And as of right now we actually will cashflow at least 2500 with low vacancy. My holding costs right now are no more than 1500 but will jump to 2500 if we switch to conventional 30 year fix. It's going to be hard to lower the price and cut my losses when it's bringing in extra cash in the meantime. I should probably bite the fricken bullet though. I would be happy to get my 7-8k back that I put in. Lesson learned!
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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    It's on the market for 348k. I need at least 330k to break even. Any suggestions on where I should price this?
    0Reply
  • Clayton Barnes
    Bloomington, IN · Member since 2017 · 53 posts · 37 votes
    9y
    Originally posted by @Taylor Silker:

    It's on the market for 348k. I need at least 330k to break even. Any suggestions on where I should price this?

    I'm a newbie, but I think you're looking at this from the wrong perspective. It is unlikely that a potential buyer is interested in what you need to break even. They aren't evaluating you as the seller as much as they are evaluating the property against other available\recently sold properties. The price needs to be based on your local market. If those numbers don't work for you, then you'll have to determine your best option going forward.

    2Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Taylor Silker  yeah that one has a lot of strikes against it. Renters that can pay $3000 a month are not common. Those that can pay that much  usually buy.   Your vacation rental is the best idea. Even at 1500 a month expenses and 2500 a month rent you are most likley loosing money. You have to figure cap-ex, insurance, PM (unless you want to manage the rest of your life) time value of  money, maintanence, vacancy, turn over cost, and on and on. Just because you make it a year or 2 doesn't mean you are out of the woods. If your payment jumps to $2500 your not making anything at all and who knows how much you are loosing. it's not worth messing with in my opinion. RR

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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    Ralph R. I'm saying right now my total holding costs with with insurance and capex and all that good stuff is about 1500. Once i switch over to a conventional it will be more like 2300. Airbnb will bring in at least 4K. I may have found a consigner though!
    1Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Taylor Silker  I see you must have more than the $7,000 invested. 30 year payments on a $299,000 loan  4.5% interest are a little over $1500 a month. I would think if you can get $4,000 a month for the Airbnb rental you might stand a chance. I would have to look hard at that. Who cleans between the rentals? How many turnovers a month?  I hope your cosigner works out for you.  RR

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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    Oh yeah and there is a couple who is willing to rent out part of the lot for their tiny house. They would pay 500-600 a month and possibly manage the property for a rent discount.
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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    Ralph R. I think we can clear 4k a month. Especially if we get the couple to rent part of the lot. And I only put 7k down total. Honestly I'm not sure how I got such a big loan. I think it had something to do with he fact that got the land first and then applied for the loan. I only had to put 2.5 or so down on the land and 5 down on the modular house. We are charging 45$ for cleaning fees per stay which might reach 500$ a month but this is included in the Airbnb pricing when they book. My sister has hired someone to do the cleaning and she willl do it sometimes too. We won't have much property management issues cause it's all short term and there's a lock box so we don't have to meet anyone. Pm will consist of someone mowing the lawn. Once grass grows.
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  • Douglas Krofcheck
    Hudson, NH · Member since 2017 · 70 posts · 47 votes
    9y
    Why are you trying to blame the bank for the size and type of loan you have? It's your responsibility to know what you're signing. Don't blame them if you change your mind later. If you think a loan is too high then don't get it. Don't expect other people to be looking out for your best interests. That cleaning service is part of your PM. Just because it's sort term doesn't mean everyone will take perfect care of the property. Things will break while someone is there and a poor response to their request can reduce the amount of people wanting to rent there.
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  • Taylor Silker
    OP
    Investor · Duluth, MN · Member since 2017 · 17 posts · 1 vote
    9y
    Douglas Krofcheck do you think I don't know I'm responsible for this loan? I'm asking why would a bank give a construction loan to someone that can't afford the final product? What is the reasoning behind that? Doesn't it seem like the bank is setting itself up for failure? And yes I obviously would be putting my cleaning cost plus plenty extra in the property management expenses while evaluating. I am a newbie that got into my first deal not knowing anything, and figured I would learn my way through the process when I started. That's basically what is happening now. Its time to either get creative or give up and try to sell the house at a loss. But why give up when there is potential on the line? Isn't that our nature as creative real estate investors? To be creative by using our infinite intelligence? Or am I just being stubborn?! Haha
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  • Douglas Krofcheck
    Hudson, NH · Member since 2017 · 70 posts · 47 votes
    9y

    I'm not suggesting you give up, just don't underestimate your potential future costs.  That's the biggest risk for us newbies.

    I don't know anything about construction loans, but I assumed the bank assumed you were flipping the property and not trying to live in it.  You wouldn't need another loan so why limit construction?

    2Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Taylor Silker  @Douglas Krofcheck  taylor you have the right idea sort of. It definitely helps to think on your feet. Most successful investors however try to eliminate or lower risk by knowing and planning for every possible pitfall.  They always have an exit that won't cost them a bunch of money.  In other words they use that wisdom BEFORE  the stuff hits the fan.  Not having expierance isn't helping here.  Not knowing what to look for can ruin you.    I'm not sure how you got in this position with only 7k in the deal.  What I'm scared of is the bank is going to want 20% down for a non owner occupied house loan. If the house appraises at 348 there's some of it. 348-309= 39,000 in equity. Add yor 7 and you have 46,000 in equity. That leaves you 15,800 short in equity so the 25k they want you to kick in will cover that. The resulting loan is for $284000 and P&I is $1438 a month.   By the seat of my pants and the 50% rule that loan payment with one of my rentals would require just short of $3,000 a month to break even. I DO NOT know about costs associated with Airbnb and vacation rentals. This is a very rough way to figure a normal rental.   It does not always work.   Douglas. There is one assumption:  you always assume (and plan for) the worst and hope for the best.   Cover your butt always with knowledge about every possible detail when entering any buisness deal. From buying gas for your car to investing. When the dollar amount hits $10,000 dollars that's when the Sharks come out.  The bigger the dollars the meaner they get.   RR. 

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