How can updates be made before purchase/financing

Question

I'm hoping somebody has had a similar situation and can throw out some ideas for me.

I'm looking to buy a rental property (3 units) with conventional financing.  The building needs about 25K in exterior work.  I would gladly buy and do this work after purchase, but it's not going to get past the appraisal (appraiser will require repairs be made).

Seller will not do the work prior to a sale (and I'd rather not let this happen anyway).  I don't want to do the work prior to sale because then I'm putting money into somebody else's property...what if the sale falls through?

So, how can I get control of the property without ownership and make the necessary repairs and then actually buy and properly finance the purchase?

I'm thinking some sort of option contract, but wondering if anybody has other ideas or more insight on how such a contract would work?

Any help is appreciated!

Michael Seeker · Answer

David Beard - HML terms are 2 points, 12% interest only and an additional closing fee of $500.  The terms are pretty reasonable, I would be fine doing this and refinancing in ~6 months, I just don't want to be stuck in the HML for 12+ months if that's what the seasoning requirements are to refinance.  Looking for around $120-130K.

I saw in your profile you do short term rehab loans and fully amortizing 3-5 year loans.  I'd love to meet up and discuss or if you'd like to send me a list of terms I can give you my email in PM

David Beard · Answer

I don't follow why you wouldn't want to refinance out of a HML in a year, or better yet, in 6 mths as conventional lenders seem to be permitting with greater frequency, to lock up the <5% fixed rate money.

By "big bank", I assume you just mean conventional vs portfolio lender.

BTW, I actually live in the Louisville area, worked downtown for many years, but primarily invest in Cincinnati due to contacts and team that came together there (plus availability of great deals).

What are your HML's terms?  How much are you looking for?

Jennifer Lee · Answer

They are both cash deals ;) I think its bc they know ppl, it was easier to convince the right ppl.:).both me and my buyer are new to the area ;)

Matt Devincenzo · Answer

Probably a cash sale. That's the great thing about cash purchase you often don't have to meet all the legal hoops. Fl requires a survey on property, I just did mine on a house I bought 6 years ago because it was a cash sale. My lender is the one that caught that I never did one back then, so I ordered it now.

Steve Babiak · Answer

Jennifer Lee - a cash buyer can find a way to get it done, especially when there is something that is coming as a result of the offer from another buyer who is being financed.

Jennifer Lee · Answer

Hi

I don't have answer but witness something like what you said done.
I don't know details bc I was out of the loop.

It was an estate, 90+ yr old executor. Didn't pass dye test.
Which SHOULD be sellers responsibility.

My client opt to let seller figure it out.. how it normally goes down.

Listor found another buyer, "friend" of executor, "friend" with municipality etc.

When I called the municipality, it was no all the way around. 
 you can't buy without passing dye test etc etc
They can't a sell, only seller can do repairs

Property was WITHDRAWN.

UNDER my nose, my client offer still valid, sold to "friend" 
I have no idea how they did it, nothing was done to fix.
Idea was for buyer to do it all....

I'm so confused, good thing my buyer was indifferent about property.

Michael Seeker · Answer

David Beard - Thanks for the suggestions.  I was really considering conventional vs. HML and completely left out local banks (River City would be my first choice - I'm guessing they have branches up your way as well?).

I can do hard money, but my HML lender has introduced a bunch of new fees and only likes to do 1 year balloons on residential properties.  I could probably twist his arm given my track record and get this place for 1.5 years or something...but it's not a great enough deal to warrant that.

I'm talking to my main lender now to see if the appraisal process will be an issue if I buy the property as-is with 25% down - depending on how he responds, I may end up going the local lender route for 1-2 years until I can refinance with a big bank (usually better terms in my experience).

Thanks for the help!

David Beard · Answer

Michael Siekerka - I don't care for the option idea, too risky.  That's a thin thread of "equitable interest" you'd be relying on.  The seller could easily refuse to go through with the sale for a ton of different reasons, and then you're stuck with the only recourse being expensive and time-consuming litigation in front of a judge that might have a dim view of lease-options anyway.

Are you sure you can't get a rehab loan with an investor-centric local bank like River City Bank?  Or even a HML if the numbers are good enough?

Tom Goans · Answer

Michael,

To work off your idea, see if the seller will enter into a lease with option to buy. This is about the only way I would acquire a structure, commercial or residential. The way I view it, the lease gives you an opportunity to take the property out for a test drive before making a commitment.

For example, I know a gentleman who bought a large property. After owning the property for about 9 months, he discovered the property has a very serious and widespread black mold problem. So far, it has cost another $250,000 in repairs and lost revenue.

When buying, I recommend making the lease agreement a separate stand-alone contract without any reference to the option agreement for numerous reasons. This will offer you the most benefits and flexibility.

Edward Burns · Answer

Talk to the bank and suggest a repair escrow similar to what HUD does for their foreclosures if financed.