What to do with my BRRRR Deal?

Question

What's up Bigger Pockets Fam just here for a little deal advice.

I am currently working to get a property under contract for approx 170k in Palm Springs, Ca. Being that I have little to no capital upfront to allocate I have chosen hard money to fund this BRRRR completely with 0 out of pocket if possible. The ARV to make this deal worth while must be above 300k+ and I have only found 1 comps in the area at 325k (other houses listed being offered between 270-295K). My question is what would a seasoned investor suggest to make this deal work with moderate rehab needed and a local private lender only willing to loan up to 70% LTV. Should I seek out a higher LTV? Or even explore other creative financing option?

Jamie Derasmo · Answer

Kenyon, sorry can't be of much help in this situation. I don't want to assume anything about the situation but it seems like it would be best for your grandmother to hold on to this since market rent would most likely increase her monthly payments (unless she has a very high interest rate). Does it need to be rehabbed right now? While she holds it, you could save up the money to do the renovations down the line before you do end up buying it from her. If she truly wants to offload the debt, could you check to see if her current mortgage is assumable? Another option could be just doing a hard money loan for the price of the rehab. After that you could do a conventional loan once it appraises for higher. It's an unconventional method but seeing as it's a personal connection, it can be done differently than a traditional style BRRRR.

Joe Norman · Answer

If you truly need an ARV above $300k for this deal to work, but can't find any comps to support that value, then this isn't a deal. Don't risk getting ruined and walk away.

Jamie Derasmo · Answer

Hi Kenyon! You have an interesting situation. Unfortunately, banks don't care much about sale price but about appraisal price, what are those homes appraising for? Target that number. I think to be on the safe side, assume the property will appraise for $270K after renovations. 270000x.70 = 189,000. This means you should not spend more than $189,000 total for purchase and rehab. Is that doable? I know you said the rehab would be moderate but that can be different in different markets. Ensure you have an accurate estimation of repair costs. This most likely won't come off the financing side but you might need to rework the purchase price with your grandma.2.With your hard money lender, make sure you know all the details. Do they have a minimum amount of months you have to pay interest on? For instance, if the rehab will only take 1 month, but they require 3 months of interest, is that deal worth it to you? You can consider other financing options but 70% LTV is common. 4. Do you have an exit strategy? Are you pre-approved by a lender to get out of your hard money loan quickly?I found this article very helpful:BRRRR Method: The Secret to Building a Real Estate Portfolio (biggerpockets.com)Jamie

Jody Sperling · Answer

If you're concerned about successfully BRRRRing the property, wholetale it. Use the hard money, spend a week or two completing the cheapest, but most impactful rehab step, and sell it to someone else to complete.I had a case where I picked up a house that was trashed. We spent $500 on two 20yd. dumpsters, emptied the trash, pulled the carpet and listed the house empty. After two weeks, we earned $30,000 and left the heavy remodel for a flipper who could make the property's numbers work for him.Especially with the market as hot as it is now, this is a strategy you can use very successfully. Best of luck!

Kenyon Williams · Answer

@Jody SperlingGreat advice! I forget to mention that my grandmother owns the property and would like to rent it upon completion so it’s in my best interest to hold

Brent Coombs · Answer

@Kenyon Williams, I agree with Jamie: "market rent would most likely increase her monthly payments", so, is there anything else you're not telling us? Unfortunately, 'Bigger Pockets' is filled with stories of folk trying to help out family members, but which end up in tears and terrible legal outcomes. Q: What is her mortgage Interest Rate, when was the Loan made, and how long to go? [I'm guessing she has increased the amount borrowed since the start? If so, that doesn't bode well for her ability to keep up with rent payments if you take it on]. Good luck...

Kenyon Williams · Answer

@Brent CoombsShe is on a fixed income so the reason for pursuing this property is to provide her with a bit more freedom by releasing her from this debt. Being a rookie the hard money seems the easiest route to purchase and rehab the property? My goal is not to make much income in this deal rather buy and hold because I do plan to rent it back to her until she is ready to downsize (she will be paying market rent). I have explored the 203k as an option as well but I just think if I was able to refinance into a conventional I would have a chance at better terms from a bank vs. the fha terms

Kenyon Williams · Answer

@Jamie Derasmo Hi Jamie thanks for the in depth feedback 1. Yes I undertstand the ARV is my target number.. this is a C class neighborhood but house are on average selling for 260-325 depending on extent of rehab. She owes about 165k and I would pay no more than exactly what her mortgage is. The last home that sold in the area with similar features sold for 325 on 1/8/21. 2. Hence the hard money lenders assuming that was my best course of action but I have also explored the 203k option as well just no very experienced in either!

Brent Coombs · Answer

If your grandmother owns it, she isn't doing you any favor if the only way you can buy it is with hard money - which I'm guessing she just wants to spend willy-nilly? And, if you think you'll be able to refinance it up to 70% (or more) soon thereafter, what's stopping you getting that finance in the first instance? Maybe you and/or your grandmother should get the HML for the repairs it needs, first? Q: If you have good income, how come you have zero dollars to put down as deposit? If nothing else, this whole scenario should be teaching you to plan ahead, right? Cheers...

Kenyon Williams · Answer

@Brent CoombsYes I do understand this; reason for the parentheses. So the most recent sale was for 325k but no other house are even being offered as high despite similar skqft and floor planI failed to mention that my grandmother owns the property