Is this deal & structure acceptable to Hard Money or Private lenders?

Question

I would like to buy a property, but have very little money. Here are the details:

Asking price $119,000. Recently reduced from $125k. 2009 "tax appraisal" $198k. Property taxes past due $5 - $6k.
6 units consisting of 1 house, 1 duplex and three mobile homes. All rented with gross rents scheduled at $2885 per month. Teneant pay all utillities. Low property tax area.

Located in a semi rural area, approx. 20 minutes from a medium sized city.

The home has been on the market for about 9 months.

I would like to offer the following:
60% to owner who would take 35% as a second position mortgage, with the back taxes, and closing costs paid from the sellers proceeds at closing. I would take prorated rents and deposits as a credit to down payment, plus $2000 of my own money at closing.
I would be putting almost all of my available cash into closing, with the intent of rents paying the mortgage for 12-24 months and refinancing. My estimated fico 700-750. Only had my job for 3 months, earning $500 a week.

I would like a Hard money or similar loan to cover the 60% down

Would a hard money or private lender (that I dont know) consider this? If not, what would I need to change to make it appealing?

Thanks in advance for your input and advice.

Jon Holdman · Answer

What is the place really worth? Tax assessments are meaningless. You need a real value. Sounds like you want to hold these properties. What's your plan for refinancing out of the hard money loan? Can you even get a loan on this wacky property? This isn't exactly a normal property for getting a loan. Hard money is typically 15% +/- and several points. So, if you borrow 60% of $119K ($71,400) and there are four points plus loan fees you'll net about $68,000. If the owner is carrying 35%, $41,650, that's $109,650. You'll need $9,350 plus you closing cost (I'd budget $2,000). Do you have that? Going into a rental property with no cash is a really, really bad idea. We've had some debates here about the proper amount of cash reserves. Six months PITI (principle, interest, taxes, insurance, i.e., you monthly payment if this had conventional financing) is my guideline. I'd guess a normal payment on this property to be about $800, so that's $5000 cash reserves. Combined with the up front costs, that's about $15000 you should have to get into this property with the deal you want. As a HML, I don't like this deal. If I have to take it back, I end up with this strange property. Its hard to sell and its a pain in the rear end to operate. Ask the seller about doing a master lease option. You lease the entire property from them and then sublease the individual units. Get a three year (at least) term. Better would be to do straight owner financing so you could own the property now. Hold it with owner financing for three years so its on your taxes and then refinancing (assuming you can find a lender) and pay him off. Are you thinking of living in this property? Most HMLs don't allow this.

Jade Atwood · Answer

Thanks, I really Appreciate the insights. They are very useful and illuminate leaks in my plan. I would not live in this property since I own my home. (well, the bank owns it)I was hoping to refi in 2 years with the added income from the property and some equity from some improvements to help justify the loan. Possibly splitting off the extra acreage to sell. I do not personally know anybody who has money, that I trust to invest with me. I may have equity for a heloc or somthing, but I am not sure if there is enough to get a loan, especially given my limited income and time on the job. I'll keep trying to work it out. Thanks again.

Will Barnard · Answer

I like your creative thinking, however, Jon provided some great advice and insight into this deal. Perhaps a private lender would be willing to do a loan say at 10% for 2 years, but you would have to have a relationship with them. Also, do NOT rely on tax appraisals, you must get an actual value. If you use the 2% rule, then from the gross income of $2885, these properties are worth $144,250. With that said, mobile homes do not carry the same value and thus adjustments lower in value will need to be made from there. At $119k, looks like you are in the ballpark of a good deal, but you will need a better structure to get financing and you will need more cash into the deal. Why not aks seller to carry back the full amount? Why not find a money partner to bring in for an equity share, someone with the cash reserves a lender would be looking for. Look at some other creative options here.

Ann Bellamy · Answer

Jade, welcome to Bigger Pockets and congratulations on putting yourself out there with your first post "I would take prorated rents and deposits as a credit to down payment," Most states require that deposits be held in a separate account, so even if you received the deposits as a credit at closing, immediately thereafter you'd need to put the money in a bank account and not touch it, so you would not be able to use it as part of your down payment. Perhaps a Tennessee landlord can chime in on this thread. Second, $2000 may not even be enough to pay the closing costs, and most hard money lenders will not lend without the borrower having significant skin in the game. A seller second mortgage is not "skin", it's the seller's "skin". You may be able to find a private person to partner with you and provide the needed cash. On the other hand, if the deal is really good for your area, a lender may consider it because he'd be happy to take it back. In this case, if it's been on the market for 9 months, even the reduced price would not convince me this is a good deal for this area. If it were, it would be long gone.