Hard Money To Buy Short Sale/Pre-Foreclosure

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Hard Money To Buy Short Sale/Pre-Foreclosure

Michael Uden
Ringgold, GA · Member since 2017 · 11 posts · 2 votes

Hi everyone,

I'm very new to the world of investment properties and have yet to even do a deal but after listening to Bigger pockets first 20 podcasts I had a question about short sale/pre-foreclosure deals.  I'll try to work through the deal as much as possible with my limited knowledge.

Here's the example:

(Assume I've found a private investor or hard money to finance 100% of this deal.)

I find a short sale/pre-foreclosure where the current owner owes the bank 75k and the home appraises for 100k as is. I offer the bank 60k and they accept. I take ownership and put in say 10k worth of repair work, which is also part of the private investor or hard money loan, (now at 70k). I get an appraisal and it comes back now worth 120-130k. Could I wait a year of seasoning while renting out the home, refinance to a conventional loan with a much lower APR and pay off the investors without paying that investor or hard money loan for that entire year out of pocket? It's kind of a 2 part question because I'm not sure on the loan structure of a hard money lender, if they expect monthly payments or if they expect the payment in a lump sum at the end of the time frame. Just trying to get a good grasp on the options for creative financing.

Thank you,

Mike

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  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Michael Uden

    A preforeclosure just means a notice of default is issued, usually 90-120 days behind payment. The notice of default is submitted to the courts seeking the amount due (principle, interest, penalties, fees). Doesn't mean any "action" has really started. Each state is different on length of time a borrower has to cure the default before any real action starts.

    Some preforeclosures have equity.

    A shortsale is when the owner owes more on their mortgage than what the house is worth.

    Example (real one): Mortgage $465k, property value $230k. They would either need to bring cash for the difference at closing, or convince the bank for the need to conduct a shortsale.

    An owner has to qualify for a shortsale, proving some sort of hardship (loss of income, reduction in income, job move, medical expenses, divorce, military move, natural disaster) and that they already tried and failed to refinance. Most owners don't qualify for a shortsale.

    Banks and their mortgage investors (Fannie Mae, Freddie Mac, etc.) are going to try and get as close to market value as possible. Sometimes you can get lucky because of the situation with the property...

    Hard money doesn't usually lend 100%. They expect a down payment. Maybe you can get a private "individual" to do that, but they'll want a premium for their risk.

    A typical example for a HML buy and fix: 70% to 75% of ARV for purchase and rehab funding with an expectation of 4-5 points up front. Interest only for 6 months @ 12%+ amortization, balloon payment at end of 6 months. If you go past 6 months expect heavy penalties to possible foreclosure. Depending on the situation, you can extend it out a bit.

    If buying all cash, you can refinance right away (Fannie Mae Delayed Financing rules). If buying with financing, most lenders (not all) will want 6-12 months seasoning before refinancing. If they allow you to refinance right away, some might make you wait before using a newer after repair appraisal due to the risk involved.

    If you put $10K in a property worth $100K, it will be worth $110k when you're done. This assumes it's $10k worth of rehab, not just materials, and you include labor costs...

    What investors do is buy the house for deep discount to what it's worth at $80k, add the $10k in repairs and get the appraised value up to $110k. For a flip, then sell it. For a buy and hold, secure a renter and then refinance to a more conventional loan at 74% ARV.

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  • Michael Uden
    OP
    Ringgold, GA · Member since 2017 · 11 posts · 2 votes
    9y
    Thank you for the response!
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