Financing Houston wholesale---cash only dilemma

[Ben Volkman]

Hey guys, looking for some advice here on how this could work. This is our first deal. My wife and I are looking for SFR or MFR and originally going to do FHA or conventional down payment. Just got an email about a wholesale offer in Houston for SFR but it requires 120k CASH ONLY. We don't have that kind of cash so we are trying to figure out how to make this happen. This would be our primary residence or potential flip depending on how the numbers come out.

Current savings: 25k

Wholesale Price 120k

ARV 180k

Tomorrow we will contact some family friends who have been in REI for awhile and see if they know anyone but I wanted to post the topic here so I can have a better understanding what I'm getting in to as far as the numbers go. This is the hardest part for me to understand and I would appreciate any and all feedback.

This is my current understanding: (my questions in italics)

PML pays 120k for the house(or do they give us the money to buy the house?, whose name goes on title: PML and us? just PML?) and we put our 25k in for rehab and repairs and it appraises for 180k. During the rehab process we are paying the PML the monthly PITI for the loan amount? (Is that correct? or do we pay in lump sum at the end?) Then we refinance with a bank for 70% LTV (is there a seasoning period or is that FHA only? Is 70% correct or 75%?)  This 70-75% gets paid back to the PML plus interest and then we pay the bank a monthly PITI based off the new appraised value.

Follow up questions: 

1) 120k house is a deal in this area even with renovations.  But if we rehab and is appraises for 180k, then would our monthly payment be the exact same if we had just bought a house at 180k that was move in ready?  It doesn't seem like a deal anymore...maybe I am missing something here

2) Seems like the ideal scenario is having a family member act as the bank and buy the house and we pay them the PITI for the duration of the loan. If they bought the house, could we then refinance shortly after and pay them back from the refi?? This makes the most sense to me and cleanest where we still get the house for 120k without the stipulation of immediate rehab. We want to rehab it just not as fast as humanly possible

[Tom Cooper]

@Ben Volkman, Typically when someone advertises cash only, they are trying to avoid the typical "out clause" in the contract related to financing, as well as the up to 60 days it can take for financing approval. You can go to Hard money lenders (HML) - there are a bunch in Houston who will typically loan up to 75% of ARV, including money for rehab. Their protection is the equity, so they will have an appraisal done to make sure it is a deal which is a secondary benefit. This is temporary, not permanent financing, which you will want to refinance into long term after the rehab is done. You can do the same thing with a private money lender (PML) and refinance out later assuming the documents are handled correctly. This could be a friend, relative, or total stranger.

My bigger concern than the financing is that you know and understand the ARV and rehab costs really well to make sure this is a deal. While there are some reputable wholesalers that can offer a deal (most of them have regular buyers and these deals never get emailed out), it has been my experience that most of the "wholesale deals" that get blasted out to sometimes thousands of investors are not really deals!!!! BEWARE! If this house went out to possibly thousands of investors, many hungry and willing to overpay for a deal, and it is still available to you, that should tell you something. Do not get in a hurry and rush into this. Take your time, learn and then find a real deal. As my friend Jason Bible says, "the only mistake in real estate investing is overpaying for a property". That is one you cannot recover from, other than holding it long enough for appreciation to bail you out!