Looking for advice on financing

Private Lending & Conventional Mortgage Advice
15yFollow

Looking for advice on financing

Jordan Bull
Member since 2011 · 4 posts · 0 votes

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.

0Reply
27 views

Most Popular Reply

Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y

Sorry, didn't read through all the details. Neither will anyone interested in making a loan, so my first piece of advice is to make your story much more suscinct. An "elevator speach".

You say it will appraise for $525K after its fixed up. I assume you have solid comps (recent, nearby, similar property sales in the last six months) to support that number.

The best possible case is a hard money lender who will give you 70% of that value. That's $367,500. Many HMLs are more like 65% and expect you to have 10-20% of the purchase of your own cash. But lets go with $367,500. The HML will take, say, 4 points off the top. You'll have some closing costs, too. So, you might net $345K off the loan. Can you fund the remaining fixup? A typical HML will want you to put that cash in at closing and then give you draws on the $100K repair budget as you do the work.

Hard money is going to be something like 15%. So, monthly payments are going to be $4,593.75, not $2,000. $2000 sounds like a regular 30 year bank mortgage, and even a private lender is going to be much more expensive than that.

A HML is going to want you to pay this off relatively quickly. Two years max, more commonly less than a year. What's your exit strategy? Sorry but 588 is terrible and 680 is still pretty bad for today's environment. How are you going to fix this and pay this loan off? Can you document enough income on your tax returns to qualify for this loan?

1Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Sorry, didn't read through all the details. Neither will anyone interested in making a loan, so my first piece of advice is to make your story much more suscinct. An "elevator speach".

    You say it will appraise for $525K after its fixed up. I assume you have solid comps (recent, nearby, similar property sales in the last six months) to support that number.

    The best possible case is a hard money lender who will give you 70% of that value. That's $367,500. Many HMLs are more like 65% and expect you to have 10-20% of the purchase of your own cash. But lets go with $367,500. The HML will take, say, 4 points off the top. You'll have some closing costs, too. So, you might net $345K off the loan. Can you fund the remaining fixup? A typical HML will want you to put that cash in at closing and then give you draws on the $100K repair budget as you do the work.

    Hard money is going to be something like 15%. So, monthly payments are going to be $4,593.75, not $2,000. $2000 sounds like a regular 30 year bank mortgage, and even a private lender is going to be much more expensive than that.

    A HML is going to want you to pay this off relatively quickly. Two years max, more commonly less than a year. What's your exit strategy? Sorry but 588 is terrible and 680 is still pretty bad for today's environment. How are you going to fix this and pay this loan off? Can you document enough income on your tax returns to qualify for this loan?

    1Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    15y

    Everything Jon says is spot on, so I won't rehash the numbers.

    Definitely condense your proposal - bullet points would work. I didn't read past paragraph 2, and no one else will either, as Jon says.

    One of the major requirements of the SAFE act that is largely ignore is that ALL lenders be licensed if they make even 1 residential loan. No longer are private lenders allowed to make a few residential loans per year without licensing. Licensing is expensitve and restrictive. And many states are on witch hunts. So private lenders in general have avoided residential loans. In NH, I haven't been able to find even 1 licensed private lender. In MA, I have found 1. I don't do residential lending, but I like to be able to refer people like yourself to someone that can help them.

    Now, part of the reason that private lenders have avoided residential is the degree of uncertainty regarding compliance with the new laws. As states refine and clarify their positions, this uncertainty will go away, and there will be more private residential lending within each state's laws.

    Some attorneys advise that a lender can make a residential loan if they use the services of a licensed originator or broker, but many lenders feel it's no longer worth the hassle.

    By the way, these restrictions apply to owner financing - investors are now regulated when they sell their own properties to homeowners with seller financing. Unless the investor lived in the property. Again, states are beginning to revise these laws,but there is lots of conflicting information out there.

    So the above is going to make your task even harder.

    So condense your proposal, and then start making calls to ask for a licensed private lender. If you can find a mortgage broker (broker numbers has been reduced by up to 90% in some states) you might find one that has a licensed private lender, or he might have a lender willing to lend with the broker handling the appropriate paperwork.

    Good luck, you definitely have an uphill climb. You also don't provide your state, that would be helpful.

    PS - "throwing the idea out to see if anyone is interested" is doomed to failure. Business people want concrete proposals: specific and brief.

    1Reply
  • Jordan Bull
    OP
    Member since 2011 · 4 posts · 0 votes
    15y

    Thank you both for the advice. I definitely understand the point on trimming all of the fat off the idea. I will save the long story for if and when they ask for the details.

    Jon, Thank you for the information on HML. I dont think this will be the type of deal for one of those guys. Basically I need a 203k but being self employed the proof of income isnt there. Not because I dont make enough but because i write off too much. Also the scores are getting tuned up right now. Just a few days ago finally got the second ssn of my report LOL.

    Ann, Thank you for the advice. I will start making some calls to find some private money. I understand about the laws as I was previously looking into a peer to peer mortgage option. However the only ones I have found do not help connect the borrower and lender only handle the transaction after the fact.

    I will draft a proposal 2.0 and see what you think.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Why not look for a house where the owner will carry the note? I bought my first house that way almost 25 years ago, and that was right off the MLS. An owner has a real interest in getting a sale. A lender is interested in making money. Many private lenders are not going to be that different from hard money lenders. They may be willing to take a bit less, but they still know the real situation on the demand for their money. They aren't going to fund a 30 year, 6% mortgage. An owner, OTOH, may well be willing to accept terms like that.

    Buying a specific house with creative terms is a tall order. You may need to be flexible on the house in order to get the terms you need.

    0Reply
  • Jordan Bull
    OP
    Member since 2011 · 4 posts · 0 votes
    15y

    Jon,
    You are 100% right. This is a property that kind of fell in front of me. Just fishing for interest and throwing out the possibility to as many folks as I can. If it works great, if not no worries. I have looked into a few other homes and yes owner financing would be perfect. I have not seen any in my area but would jump on the opportunity if i could.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    You should have you agent ask the listing agent about seller financing. Also have your agent look in the agent comments in the MLS listing. These won't show up on any of the public sites, but agents can see them and they sometimes state the owner will consider carrying a note.

    A simple owner carried note on a free and clear property is best of all. But there are alternatives to that. An "all inclusive trust deed" or wrap mortgage where the existing mortgage is left in place and "wrapped" by a new mortgage between the seller and you is another option. That gives you a deed, the seller a deed of trust, so its almost as strong (from your perspective) as a owner carry. Buying the property subject to is another option. Again, you leave the existing mortgage in place but take over the payments. You still get a deed, but the seller doesn't have the same security as with a wrap. A land contract is slightly weaker, still, because you don't get a deed. But you do you a land contract, which can be recorded against the property. A lease/option is the weakest for the buyer. You don't get a deed. All you have is an ordinary lease and an option.

    All of these except the first do violate the due on sale clause and risk the lender calling the mortgage. If you're diligently working on the credit situation and trying to do something with the tax returns so you can actually qualify for a new loan, then you have the ability to refinance (wrap or subject to) or complete the purchase (land contract or lease/option) and pay off the lender. As long as the payments get made, interest rates remain low, and banks are distracted with all these foreclosures your risk of getting called seems to be low.

    If you find a property you can live with and its been on the market for a long time, the owner might be receptive to something creative. Be sure your agent checks the listing history, not just the current listing.

    0Reply
  • Jordan Bull
    OP
    Member since 2011 · 4 posts · 0 votes
    15y

    Thanks for the breakdown Jon.

    I have been flying solo for a while with a listing book account because I have yet to find a "go getter" agent in this area. I have dealt with a few and it seamed as though their spirit had been killed by the recent market.

    Maybe it would be best to hunt for the right agent then work on some of the ideas you presented. Also the credit should be all set in another few months and the taxes will look good in february. Im just going to bite the bullet and not take all of my deductions so I look like a normal person.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free