Looking for advice on financing

[Jordan Bull]

Ok I am looking to finance a slightly less than normal deal. I have posted some info around looking for private lenders, but could use some tips as to where to look and if my approach is ok.What follows is what I have drafted so fat for preliminary info on the deal.

My wife and I are expecting our second little man and started looking around for a new home with a little more room for our growing family. While looking I stumbled across and interesting opportunity. I am just looking to throw the idea out and see if anyone is interested. I am a Contractor not a Finance guy so the ideas and terms I set forth are definitely open to suggestions. I think this opportunity would be perfect for someone with a good amount of investments that wants to try something with a little higher return or someone who wants to get their feet wet with "hard money" lending.

A little about myself, I own a medium size residential construction firm. I do very well as I have two niche markets as a green builder and a high end remodeling specialist. My wife and I have decent credit. I posted in the bad credit category just to be completely honest about my score. I have a 588 and my wife is in the 680's. However if you look at our credit history it is very good over the past 3-4 years and we are only waiting for old delinquencies to fall off.

Now for the house. The property was originally your classic 1970's single story ranch. It is owned by a fellow contractor and he has been building it up over the years. Through a relatively long course of events the property has landed in bankruptcy court. They have had it on the market for almost a year now. The difficulty selling it due to the fact that the major second story addition is incomplete on the interior. It was originally listed at 439,900 and has seen a decent amount of interest of the past year. However all qualified buyers have been scared away by the amount of work needed to complete the home, or those capable of handling the work were not able to secure financing due to the condition of the property.

The current taxes are 9,074 but that will easily be changed in February when the appeals board meets. The reason for the current tax rate is that the assessor had done a drive by inspection of the property. The house looks 100% complete from the outside and so he recalculated as such. Additionally the work so far has been done without a building permit. I have a good relationship with the building inspector (I own a Residential Construction firm) and have already worked out a plan with him to correct this so all existing and future work will be inspected and up to code. Once the permits are filled and the taxes appealed they will most likely be in the low to mid 5,000 range based upon similar properties in the area.

The plan for completion of the home would be as follows. There is an existing in-law apartment that could easily be fixed up in a few weeks. I would address this first so that I could move in there and get ready to tackle the rest of the property. The original owner was living on the first floor while renting the in-law and building the second. I believe in order to complete the project properly the first floor will need to be renovated along with the completion of the second. This way the two will work together creating a higher quality finished product and I will have the ability to make the necessary energy efficiency and aesthetic upgrades to the older portions of the structure. This phase of work would include a good deal of higher end detail. Any potential buyer for this home down the line is going to expect a certain degree of bells and whistles for a home this size and in this area. However this can not be taken to far. My appraiser says the neighborhood can support a final value in the low 600,000 range and I would not want to exceed this. The second phase would be completed in roughly six months at which point my family and I would move upstairs. With this complete I could then focus on the finishing touches to the property including landscaping and any other detail work needed on the exterior of the home.

The initial idea for the investment would be 425,000. This would be for a purchase price of 325,000 and 100,000 in escrow for renovations. Realistically the renovations are estimated to be anywhere between 75,000 and 100,000. I would rather be up front and on the high end with whomever ends up investing so both of us are ensured a completed high quality product at the end. It should be worked into the agreement that upon completion of the renovations any additional money is returned to the investor. I can provide all necessary parties for title search/insurance, legal requirements, escrow and loan servicing. If the investor has any preference for any of these that would be fine as well. Monthly mortgage payments of roughly 2,000 would be made to the servicing company and would include payment for the adjusted taxes and the required property insurance. After a five year term the entire initial investment will be re-payed by transferring the property to a traditional mortgage leaving the investor with the profit of the monthly payments. For security the investor will be first lien holder just as any traditional mortgage would be. The property will appraise in the 525,000 range within the first six months. This gives the investor a nice cushion of equity should anything go wrong.

My part in this would be the design and management of the completion of the building. I would be utilizing my own crews at cost for the majority of construction. Additionally I have already spoken with my sub-contractors and suppliers about the project and they are willing to provide significant discounts as a favor to me for providing a steady stream of business over the past few years. Without these discounts and my direct labor the project would be easily 30-50% more expensive and not as worthy of an investment.

I know the seller and bankruptcy parties are very anxious to get this property sold and they do currently have another offer on the table. If someone is interested in this project I can put in an offer soon. The lawyers will allow us a bit of time after receiving the offer to complete a title search, finalize the details of the investment agreement, and provide proof of funds. If you or anyone interested has any other questions please don't hesitate to ask.