In a bit of a bind.....advice?

Question

We purchased a rehab flip home awhile ago and made a huge mistake not re-financing at the start to liquify our funds again. We also trusted a "friend" to work on it (paid), but he averaged 10 hrs/wk - had many excuses why he'd work one week, then take off 2-3 weeks - he's since been fired.

Anyway, here we are.....running out of funds quickly and we're still in bare studs..... The only amount owed on this 4 BR, 2 1/2 BA home is $30k we borrowed from the bank (to pay this guy to do it and carry it).

I've been looking on-line at hard money lenders such as prosper.com, but I'm wondering if we should go back to the bank we borrowed the $30k from - it was a 1 yr interest-only loan - to see if they'll loan us more to finish it (I'm sure they'll extend the term, but that doesn't solve our money crunch).

Or do you have other suggestions? We're much heavier on the credit card debt now than we were when we started - this rehab was s/b a simple kitchen/bath redo, but when we tore out the existing kitchen, it became very apparent, it needed everything re-done.

We only paid $50k (plus the $30k loan) for the house and when we get to the finish line, our area should support a selling price of 189k (conservatively), so there will still be a profit at the end - IF we can successfully get to the finish line.

My husband does remodeling for a living, BUT here's the rub - we don't have enough funds left to both carry it and replace his wages for him to work on it f/t, which is what we'd like the additional funds for - to either hire someone else or have him do it and go to p/t or take a leave of absence from work until it's done. He's working on it evenings and weekends, but it's moving very slowly along and we're fearful we're going to run out of carrying funds LONG before it's finished (and sold).

We have MUCHO finishing materials already - almost everything we need (b/c as I said, we weren't figuring on tearing it down to studs in the beginning)......in your opinions, should we try to sell it as is to another "investor" or try to borrow more money and finish it? And if we do borrow more, how/from where?

The home is in Centre County, PA - and real estate market here is pretty "stable", so houses are still moving and haven't lost their values like many areas.

Thanks.

Jon Holdman · Answer

You're right, Will. For a deal like that it seems like you should be able to find a lender who would look at nothing else.

More typical deals I see are purchase plus rehab at 60-65% of ARV, with rehab being 10-20% of the total. If you fund a deal like this, and the buyer flakes out, you end up with a house that's worth, at best, right about what you owe if they've done nothing. If its fixed up, and you have to dump it quickly, you might get 85-90% of what the ARV was thought to be. I wouldn't say the markets plumetting here, but its not appreciating much, either. If you loaned 70% of ARV, and have to set on it for six months waiting for a sale at 85% of ARV, you're eating six months interest, plus a month or two the borrower didn't pay. So, a failed deal ends up being somewhere between break even up to slightly profitable.

So, you really want to try to be sure the borrower has a backup plan if they can't sell. If the borrower has crap credit and no reserves, then their only exit plan is to sell or to give it to the lender.

Back in the day, the lender could be reasonably assured of getting 100% of ARV, if not more, for a failed deal. That meant it wasn't that big a deal if the borrower defaulted. Much different now, so I'm not surprised you're having trouble finding a "true" HML.

Account Closed · Answer

Jon wrote: Maybe not in CA or PA, but here in CO, yes, its possible to get up to 70% of ARV for a hard money loan. Yes, you will have to have a minimum FICO.

Well, if the creditworthiness of the borrower is relevant, it's not a true hard money source. Nonetheless, would you please post the name of such a source in CO. Since I have good credit, I'd like to follow up. Many thanks.

Nicole Thompson · Answer

Okay, so we met w/the bank on Friday - and she felt we could do another line-of-credit kind of thing like the 1st time. Welllll, heard back today they no longer offer that sort of lending on these types of things......

What they want is a 15-yr loan w/fees, which doesn't "bother" us, BUT this time, they're requiring an appraisal...... So, we're not sure what to do b/c we don't want to say yes on proceeding w/the loan and the appraisal and incur the fees associated w/it if the house won't appraise for enough to close the loan.

So my question is, when a house is down to bare studs and under construction, how do they appraise the value (what's it based upon)?

We also have a plan in place to get the house DONE - our goal is March '09 - but these funds were somewhat critical for the plan....

Jon Holdman · Answer

Maybe not in CA or PA, but here in CO, yes, its possible to get up to 70% of ARV for a hard money loan. Yes, you will have to have a minimum FICO. And, yes, you'll have to prove some exit strategy. Yes, the points and rate will be painful. But, if you can find a good enough deal, you won't need much or any cash.

Ana Hyler · Answer

My advice is to be honest with your bank. Tell them the house is being worked on...they should be able to give you a good idea of the appraisal process in this case. Do not guess.... be stright forward and it'll be better at the end.

Also, if your husband works in construction...and the property in near where you live... 2 or 3 hrs a day and the weekends...that should get you up to speed in getting this project done.

Good luck !

Account Closed · Answer

Jon wrote: If $189K is a realistic selling price, you should be able to find a true real estate hard money lender who can help you out. Even if you need another $20K to finish, getting a hard money loan for $100K on a property with an ARV of $189K should be possible.

Not possible. In my experience--and I've made at least 100 inquiries with various hard money lenders--there are no "true hard money lenders" in this environment. They ALL want (1) minimum FICO; (2) down payment; and in many cases, (3) evidence of income.

For this reason, I'd be amazed if weirdalfan found a lender to help her finish the job. The best she can do is flip this project to another investor who does, in fact, have the wherewithal to finish the job--even if she flips it for exactly what she has in it and not a penny more.

Lesson learned. These days, there's no such thing as "No money? No credit? No problem! Buy real estate and get rich!"

Nicole Thompson · Answer

The bank already knows it's "under construction" - their knowing isn't the problem - the appraised value in its current state is what I'm concerned about.....

Nicole Thompson · Answer

Thank you for the suggestions. We have a meeting on Friday w/the original local bank to discuss "options", so we'll see what they say (they loaned us the original amount w/out even looking at the property or appraising it). In the meantime, I've also contacted a local mortgage broker we've worked with in the past and he's doing some research to see what he can come up with - including hard money lenders.

We've also thought of trying to bring in a partner.....just a little leery of that.....and not sure how that would work since we've already invested so much into it.....but we're not ruling anything out at this point.

Nicole

We've also thought of trying to bring in a partner.....just a little leery of that.....and not sure how that would work since we've already invested so much into it.....but we're not ruling anything out at this point.

Nicole

Shane Wilson · Answer

Is your loan a commerical loan? If so ask if they will redo the loan as a construction loan so you can get draws as the work is completed. If they won't shop around a few other banks and talk to their commercial lenders to see if they will.

If you can't get a commercial construction loan because of credit and/or lack of cash you may need to find a partner to bring into the deal or as mentioned a hard money lender.

In a bit of a bind.....advice?

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