How to fund the Rehab of my deal

Question

I'm a new investor and I currently have an assignment deal in Baltimore Maryland, below are the numbers for the deal

ARV: 225,000

Rehab: 80,000

Purchase: 75,000

I am currently working with a mix of local and national lenders, but with each interaction, I feel like I'm missing something. My goal is to pay $25,000 at closing ($15,000 for purchase and $10,000 for fees) or less and get a check at closing to start the renovations, but some of the lenders I speak to seems to reimburse me for the expense, which seems to me I would need another $20,000 to get started with the renovations.

Since I don't have access to that level of cash I wanted to get feedback from the community about what I may be missing. Do I need to front the renovation cost of things like permits, dumpster, materials, etc. Or can I get the funds at closing to accomplish all this, Or am I missing something about how contractors bill lenders and this is not an issue?

Can someone help me understand this process better

Thanks

Sean

Beth H. · Answer

We are investors as well as hard money lenders for last 16 plus years in the Maryland market. Those terms are typical. You will need about 10 percent for down payment plus closing costs to get to settlement. Then you should have access to cash to start the work until you are reimbursed by lender through a draw schedule. No hard money lender I know will advance construction money to you. It is held in escrow until work is completed in stages. I hope this helps.

Andrew Michael · Answer

@Sean Fuller These numbers actually work for a 90% funding scenario. A few points to bring up. If $25k is the absolute max you can contribute to this deal then I would say you are slightly under capitalized to move forward. Keep in mind you will have carrying costs as well as unexpected costs throughout the project. I would like to see you have an additional 8-10k as a "safety net". Also as @Ned Carey pointed out most lenders have a reimbursement style draw. The main point is that they want to ensure the money that is being released is being put into the project and not for personal use. I typically like to put my people slightly ahead after draw 1 so as long as you are showing progress with the project that shouldn't be an issue. Things like ordering the dumpster, doing demo, getting materials on site, etc are things you could potentially do yourself and possibly afford you the ability to get out ahead of your draws so you do not feel as much pressure coming out of your pocket. I sent you a message, shoot me a call if you have any questions.

Ned Carey · Answer

@Sean Fuller as already said that is the norm. Renovations are not paid for in advance by lenders but reimbursed as they are completed on a "Draw Schedule" Some possible solutions or at least partial solutions; partner up or use a private lender, or use credit cards to fund materials costs. You can slightly front load the Draw schedule. Tell the bank you need $10K for the first draw but the work will only cost you $8k, so you get $2K ahead after the first draw. If you are two aggressive with that, the lender will spot it and not allow it.

Stephanie P. · Answer

SeanOn this one, act as a wholesaler, assign the contract and use the cash to fund the next flip. @Andrew Michael is correct, you're under capitalized and frankly it's rare to see 90% for the acquisition without a track record.Well done on finding this deal. Hope it works out for you.Stephanie

Account Closed · Answer

I believe is an industry standard. You go some and they go some as well. Some Hard Money lenders can give you money at closing to start the rehab so continue to call everyone.

Sean Fuller · Answer

Thanks guys for sharing your experience, after reading everyone explanation, I call a few GC and it seems they are use to working on draw schedules. I'm working with a local Hard Money lender since they seems they would be more involved. @Andrew Michael, I have access to additional funds but I wanted to keep as much of it in reserves as possible to ensure I could deal with emergency (both cash and credit). I'm almost done and I'm looking forward to having a successful flip. Thanks everyone

Nghi Le · Answer

Most HMLs operate on a reimbursement model; it ensures they're never underwater. I know of a few in Washington that will front the rehab, but we come from different Washingtons :-)Some options I can think of:Bring in a partnerGet a personal loan (i.e. from SoFi or something)Negotiate with your contractor so that you guys are on reimbursement termsPay for materials yourself using a credit cardNote that even if a lender says they'll lend 90% of the total costs (purchase + rehab), they'll still want to see you have reserves in the bank to account for a certain number of interest payments and some money to front the rehab (usually 10-20%).

Richard Carlton · Answer

@Sean Fuller Send me a PM when you have a moment, I have some questions and some possible ideas for you but I need to know more specific details.

Patrick Daniel · Answer

Are you working with a GC or subcontracting all yourself? If you are going the GC route, explain to them the draw schedule and that you will give them 10% extra of your profit at close if they are willing to get paid as you receive your draws. It may cost you more this way, but its better than no deal if the numbers still work.With my lender, I am usually able to get paid within 48 hours of work portions being completed. So if you are able to front 50% up front, then you could get your contractors to accept final payments within 5 business days of work completion. This is what I have been doing and it works great.