Owner Occupied Hard Money?

Question

Mike Wood · Answer

@Seth Tucker Could you try doing seller financing, with small initial payments (i.e. amortized over 20-30yrs) with a balloon payment due in 12 months. Negotiate a small down payment so you can use your money to make the necessary repairs. After 12 months, your property should be in good condition to be able to pass a bank inspection, and the appraisers will be able to use sales comps for similar small houses (even if there is no any 1 bedroom sales) and adjust accordingly. When you refinance it at 12 months, you would use the proceeds to pay off the seller financing. This assumes that you have the capital, or access to the capital to make the necessary repairs.

I personally would look at adding to the house to make it at lease a 2 bedroom house. If you have enough ft2 in the house, you might be able to reconfigure the house to add the bedroom, but you will likely need at lease 700ft2 for a 2 bedroom and 1000ft2 for a 3 bedroom. Adding bedrooms would definitely make it much easier to sell and rent.

I personally would look at adding to the house to make it at lease a 2 bedroom house. If you have enough ft2 in the house, you might be able to reconfigure the house to add the bedroom, but you will likely need at lease 700ft2 for a 2 bedroom and 1000ft2 for a 3 bedroom.  Adding bedrooms would definitely make it much easier to sell and rent.

Bill Gulley · Answer

It's smart to know where you're going before you start. Look for a bank that has portfolio financing, not just strictly commercial but the portfolio loan will likely be on the commercial side.

Banks or any mortgage lender lending on an owner occupied will be following Dodd-Frank even in portfolio loans. This will be termed as a "high cost mortgage" and has appraisal requirements to be met. As a residence, that won't appraise out, (1.) there is too much value in the greenhouse attached than to the residence (2.) won't be getting a market approach on a 1 bedroom or with the greenhouse (3.) it's not common for the area (4.) the highest and best use probably isn't residential (5.) marketing time on an appraisal can't be established......there is just a list of appraisal aspects with non-conforming properties.

Approach the lender as a mixed use property, commercial with a residence. A commercial loan will keep it out of Dodd-Frank requirements. For a no-cash-out refinance I'd say you're looking at a LTV of about 50 to 70% depending on your qualifications. Another issue will be zoning, they won't be jumping on taking a commercial building in a residential area.

The owner is pretty much stuck, the use of the property is very limited and the lack of financing alternatives drives marketability down as it is also reflected in the value. A 10,000 sq ft greenhouse is more valuable to a nursery operation, if the seller can't find someone in the business that can use it, they are stuck. No one can meet any balloon payment on a short fuse unless they are paying cash on a non-conforming property, not saying impossible but not likely.

I'd say the seller needs to understand they have a white elephant and carry the loan fully amortized at a reasonable payment, 33/36% of a buyer's income with the ability to pay. :)

Adrien C. · Answer

To answer a question you asked that hasn't been touched yet- I've never known a hard money lender lend for owner occupants recently because of Dodd Frank laws.

Seth Tucker · Answer

@Bill Gulley you hit the nail on the head with thise points. I have a buyer lined up with cash in hand ready to take the green house away, and I will install a new lawn on the freshly leveled ground.

Account Closed I figured your loans were non-owner occupied, I planned on assigning my option to a friend who would hold the note and leasing it from him until I sell or refi out. What are typical term lengths?

Seth Tucker · Answer

@Troy Zsofka I did get the septic checked, and its functioning correctly all the way out to the leech field, so green light there. A new tank delievred and dropped into the hole I dig for it will run me about $1,600 for the whole thing, including the 1,500 gallon tank. I checked with the town code enforcement officer ahead of time to be certain, and he did say a new shelf plan would be required when I do the conversion from the 1 to 3 bedrooms, which is fine by me. So total project cost would be around $3,000 based on all the sources I have confirmed can do the work this way. I too wanted to avoid an $8,000 surprise.

Account Closed I saw your posts about hard money and NH a few days ago and checked your site. I didn't see, but do you typically charge points and have a range for the interest rates? I am interested in talking tomorrow.

Troy Zsofka · Answer

@Seth Tucker -

@Mike Wood makes a great point. If the seller is super motivated, you should be able to make the seller-financing case; assuming the down-payment covers any existing payoff (if not, you could do sub2, but I have zero experience with that).

As far as question #2 above (N/O/O loan that isn't based on your personal income), I have recently come across Account Closed who has a 30-year fixed program for buy-and-hold. My understanding is that the underwriting is based on the rental income only from a DSCR perspective, and the terms are pretty decent for private money (assuming you meet certain qualifying parameters such as credit, LTV, etc). I also believe that there are no seasoning requirements; meaning that once it's renovated and rented, you can use your sweat equity to meet the LTV requirements. Don't quote me, I've never done any business with him, but it may be worth reaching out to see if your situation may be a fit for his programs. Who knows, he may even be able to help with the acquisition and renovation portion.

One other thing: Have a septic inspection done before you pull the trigger. You don't need an $8K surprise later on. Let it be the seller's surprise now - you can use it to negotiate a lower purchase price, because if the system fails inspection, the seller either fixes it out-of-pocket or accepts a significant reduction in the saleability of the property; thereby making the proposition of seller financing with you much more attractive. On the same note, if you do intend the convert it to a 2- or 3-bedroom, you'll definitely need to consider the capability of the existing septic system, even if it passes inspection (the town code-enforcement office certainly will).

Good luck,

Troy

Rick H. · Answer

@Seth Tucker Your initial post implied that you already owned the property. Now it appears that you are attempting to, or in the process of, purchasing?

Until you close and record, the problems still belong to the seller.

It sounds like your plan is rather malleable. Are you buying to resell or to reside? Since you're now trying to improve and resell, it would be best to use seller financing for acquisition.

@Bill Gulley suggestion about portfolio lender might make sense however these loans are still at a premium, although maybe less than hard money.

Essentially, you're buying real estate that includes a business building (greenhouse) and caretakers house. In northern CA and anywhere in CO, this would be an easy cash resale.

Seth Tucker · Answer

@Mike Wood you hit the nail on the head about the comps. There are no other 1 bedroom home sales in the town, the green house foundation is transite board (asbestos), and the property has an old steel septic tank that hasn't been pumped since 1992, so the lid rusted shut. It hasn't failed but the portfolio lenders have all said they require it to be repaired prior to doing an appraisal.

I did get the property fairly cheap and the seller said he is under financial strain so selling is a priority for him.

Mike Wood · Answer

@Seth Tucker It is not clear why you can not find conventional financing.  While the property is not typical, if it is an actual house and the value is there, the property would not likely be the issue.  Banks make loans on 1 bedroom condo's, so I wouldn't think that a 1 bedroom house would be an issue, assuming that the value you are paying is justified with sales comps.

Is the problem with your particular financial situation?

I am not sure why you would use hard money, then turn around to refi. You did not state that it needs work, but maybe that is the case.  Hard money is really expensive compared to conventional financing, but does allow alot of flexibility.   Either way, you are going to have to prove that the value is there to lend on, and you have the ability to repay the loan.

Owner Occupied Hard Money?

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