Rehab Loan Options for Live-In Flip

[Ethan Macklin]

How can I find private money lenders or other options to finance a first time house rehab and flip? Need ideas for how to structure the loans and closing deals to allow financing for this property. See my story below:

Hello. I am a 22 year old recent college graduate in STEM, who will be making a strong salary for my area (Rural Midwest). I would like to purchase a house near my new job that has potential to be turned as a long-term appreciation/flip.

In my search I have found a distressed, foreclosed house that has big upside potential. 2700 sq 4 bed 3 bath that is listed ~90-120k below FMV for similar turnkey homes. However, this home has no furnace, water heater, or AC unit (destroyed in flooding; power was shut off to house, sump pump didn't run, basement flooded) I estimate this to cost about ~20-25k and the whole house needs updating/reno.

The mortgage lender I am working with has expressed reservations about underwriting a home with no heat. I think this house could be a great deal, but I have no idea how to negotiate/acquire a loan for renovations when basically all my current cash would be going to down payment. Additionally, I think the best way to proceed would involve the seller "buying" the repairs through my secondary financing prior to obtaining the full mortgage for better terms. I have no experience with private money lending or other avenues, and am looking for any ideas or experience with a similar situation.

Also, is refinancing after rehab the way to go for live-in? Exit strategy ideas? (Rent after rehab, sell, etc...) Any help or insights would be appreciated.

Thank you!

An aside: Good Credit Score in the 780s, no college debt, starting salary about 80k, house listed for 95k in a good school district ("wealthy" part of town). I have worked for a national-sized GC firm, as a business accountant, with a local GC and electrician in high school and have been a follower of BP for several years, so not as worried about technical/rehab skills as I am about capital and deal navigation concerns.

[Alan Faitel]

You need a partner, maybe a family member with Deep Pockets, Or a private money lender or any one that will take ½ of the profit after you sell the home when it's fixed up. Then you will have the money for the second deal.

[Nathan Harden]

When it comes to if you should keep it or not sometime down the line, I think that will entirely depend on what the market is like when that time comes. If you're not seeing the return from renting it out, then sell it. Also, I think the cash out refi is always the way to go. You would essentially be living in a live in BRRR

[Andrew Postell]

@Ethan Macklin as far as lending goes there's a few things you should know:

1. Standard Loans - Standard loans require the home to be in a certain condition when lending on a property.  Basically it must be move in ready.  What about a dated kitchen?  That's no problem.  Old flooring?  Generally not a problem.  What about NO kitchen?  That's a problem.  NO flooring?  That could be a problem.  An experienced loan officer should be able to tell you about this.  And specifically about the heat.  If the property has no permanent heat source - that's a problem.  No "reservations" about it.  You won't be able to get a standard type of loan on this property.

2. Renovation Loans - Renovation loans are loans that allow you to rehab the property as a part of the purchase.  You buy the property like normal and then roll in the renovation costs.  Your downpayment is now based on the total amount of the two.  So basically PURCHASE PRICE + RENOVATION = $X times the downpayment amount (usually 3.5% to 5%).  So now you can fix everything with the property that you need to when you purchase it. 

Now, I'm simplifying these loans here.  I haven't talked about qualifying, contractors, timeframes, or anything like that.  But these are the concepts of the two.

Not every lender will offer renovation loans.  So make sure you are working with a lender that knows the difference and can educate you on your options.

Hope all of that makes sense.

[Ethan Macklin]

Thanks everyone for the replies. After talking to the current mortgage lender I am working with, and reading your replies, I think the most straightforward solution would be getting a rehab loan for the property+ cost of major (water heater, furnace, ac) repairs, and using private money for any additional rehab costs so I could complete those without a contractor clause, then refinancing those into a traditional mortgage once rehab was complete.