Investor · Toledo, OH · Member since 2012 · 292 posts · 34 votes
I'm targeting a property with about 20k rehab but will sell as is to a homestead buyer. I want to use an HML to fund (most of) the acquisition. When I resell the house on terms a 1st will be created and sold cover a pay off the HML loan (after discounting) in 1-2 months. A small 2nd will stay with me. The end buyer will be responsible for the rehab.
Hard money is usually for rehabs. I know other investors do the strategy above but I need to clarify a few things:
1. Are most HMLs comfortable having their funds be used as gap funds during a resale period? 2. If the rehab responsibility will fall on the end buyer will HMLs accept this and not require rehab funds (from me) be escrowed and drawn against?
Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
3y
I think they key for a HML would be to make sure that their LTV ratio's are met. If you are adding value through a rehab, this normally gives you more room, that being said, you shouldn't have to do this. Legitimate concerns that I would have and a HML will have:
2nd sale appraisal, if you have not done any rehab to the property, it will be hard for an appraiser to justify you selling it for more money than you bought it for. Second, I would be very concerned about how hard it will be to sell the 1st position you created. Secondary financial markets are incredibly unstable right now, so I would guess that you take a discount on the paper that you are selling. Before doing this, I would talk to who you are going to sell the note to, see what their underwriting standards are, and make sure you aren't going to have to take a 85 cents on the dollar haircut in order to get the cash out of the first.
Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
3y
I think they key for a HML would be to make sure that their LTV ratio's are met. If you are adding value through a rehab, this normally gives you more room, that being said, you shouldn't have to do this. Legitimate concerns that I would have and a HML will have:
2nd sale appraisal, if you have not done any rehab to the property, it will be hard for an appraiser to justify you selling it for more money than you bought it for. Second, I would be very concerned about how hard it will be to sell the 1st position you created. Secondary financial markets are incredibly unstable right now, so I would guess that you take a discount on the paper that you are selling. Before doing this, I would talk to who you are going to sell the note to, see what their underwriting standards are, and make sure you aren't going to have to take a 85 cents on the dollar haircut in order to get the cash out of the first.
Investor · Toledo, OH · Member since 2012 · 292 posts · 34 votes
3y
Thanks @Nathan Grabau! There isn't a 2nd appraisal since it's an owner finance sale; no bank lending or appraisal needed. Wow, 85% discount seems incredibly steep, I thought I'd take about a 15-20% haircut! But I will definitely check into this now
Thanks @Nathan Grabau! There isn't a 2nd appraisal since it's an owner finance sale; no bank lending or appraisal needed. Wow, 85% discount seems incredibly steep, I thought I'd take about a 15-20% haircut! But I will definitely check into this now
Oh I mean you sell a 100k note for potentially 85k. Also the bank will likely want to see the appraisal you did when you sell the note, because the buyer of the note will value the note in part off of its loan to value ratio.
From the banks view, (this is an extreme example I am going to offer to make a point, I know this isn't what you are doing) you buy a property for 100k. You do nothing to it. Sell it for 1m to someone with owner financing and then sell 800k of the 1m note to a bank. They know the collateral is not worth 800k, let alone the 1.1m they need it to be worth to put 800k on their balance sheet.
Investor · Toledo, OH · Member since 2012 · 292 posts · 34 votes
3y
Yes makes sense, thanks. Is there any wiggle room at all or will banks and other note investors pass on a note where the collateral appraises for 100k, has a 75k 1st and 25k 2nd on it (I only want to sell the 1st, the 2nd is a keeper)?
To minimize HML costs I would like to sell the 1st as soon as possible to pay off the HML loan. But I understand unseasoned notes also sell for less?
Lender · Member since 2018 · 617 posts · 275 votes
3y
1. Are most HMLs comfortable having their funds be used as gap funds during a resale period?
The best route is probably either an individual private money lender, or a HML that provides transactional funding. I would think either of those are more likely to be in line with what you're seeking.
There are a few wrinkles in your scenario that are likely to create pause in typical HML underwriting;
1) The 2nd lien that stays with you: Many HMLs want to be the "1st and only" lien on the property.
2) The $ amount of the loan: Many HMLs won't lend less than 50k, and even that floor is relatively rare. Many have 75k or 100k minimums.
2. If the rehab responsibility will fall on the end buyer will HMLs accept this and not require rehab funds (from me) be escrowed and drawn against?
Essentially, it sounds like you're seeking acquisition bridge financing, which will then be paid off from the proceeds of the end buyer.
It sounds like you're intent on holding a 2nd lien, effectively providing seller financing to the end buyer of the property.
It sounds like no renovation work will be completed during the initial loan you're seeking, in which case a lender is unlikely to provide any renovation funds (or holdback).
Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
3y
What are you actually trying to accomplish here? If I was the bank buying the note, and you buy the property for 75k, and sell it for 100k, but you hold both the first and the second, without an appraisal, I would lean towards saying the property is worth 75k and an appraiser would probably take a similar view.
I can't speak for all banks too, so maybe you talk to some to here their offical standards for buying notes.
Investor · Toledo, OH · Member since 2012 · 292 posts · 34 votes
3y
The strategy:
1. Buy a house at around 70-75% ARV - repairs. light rehabs, nothing more than 25k.
2. Primary funding source is an HML. To cover any shortfall: PMLs, down payment from homestead buyer, and partialing a 2nd lien taken out post COE (of transaction 1).
3. Resell the house on owner financing, as is condition for 110% ARV - materials cost. During resale a 1st (wrapping the HML lien) and 2nd are created.
4. Sell the 1st to wipe out the HML and other bridge financing. Hold onto the 2nd.
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On my "things to find out list" are the following:
1. Will a low appraisal of the property cause note buyers to pass on my note?
2. Will HMLs shy away from bridge financing a property for 1-2 months based on an investor planning a resale in as-is condition, owner financed, reselling a note to cash out the HML lien?
3. What discount does a lack of seasoning demand in the market (on a 1st)?