Need ideas - can't afford hard money loan

[Jonathon Buder]

Good morning/afternoon everyone.

I have found a property that seems to be a great deal with a lot of potential, but it's by all means a fixer.

The price it's listed for it $250,000. It just got listed yesterday. The estimate from Zillow is $507k, Eppraisal is $530k.

It's a once-high-end house on a big lot with mature trees, bushes, lots of privacy, etc. The pool is full of algae, the inside is full of junk, the carpets and possibly floorboards are ruined because there's a hole in the roof and it's been raining for the last week. The location is wonderful and the median home price is $520k.

I would like to take on the project. Unfortunately, at first glance when I looked at a hard money lender's terms, at 1 year interest-only at 12.5% APR, the payments would be $2604 per month.
Please tell me if I'm doing it wrong ((250,000 * 0.125) / 12)).

I would assume that the after-repairs value would be right around the median price for the neighborhood ($520k), but my intention is to live in it once it's habitable and then rent it out if I have to be an owner-occupant to get better terms on a deal I find in a year or two.

I'm going to have a professional handyman friend of mine go back with me to take a look and get a rough idea of the cost and timeframe to do the repairs.

So my question is this - How can I go about financing $250,000 for a fairly short period of time, during the repairs, and defer the payments or amortize the total amount to be paid over a longer time period?

My first thought was to get a longer-term loan, say 3 or 4 years, for the amount of maybe 6 months' HML payments at $2600/month. This would be manageable and I could pay it off early after I refinanced the property after repairs for a 30-year term.

Then again, long-term financing of a short-term loan sounds dangerous and almost as bad as financing a 'down payment'.

Please share any thoughts you might have. I have a few possible local contacts for a private financing agreement too...

An added complication is that my income is currently $1900/month net, with no housing payments, and in a couple months it will be $3850 but I'll have to move out of the free government quarters.

[Jon Holdman]

As a HML there is no way I would do this loan.

First, you don't even know the real value. You're speculating, based on median prices and zillow. You need real comps and real evaluation rather than a guess.

Second, you want to live in it. Hard money makes sense for investments. If it doesn't work out, you walk away quietly and painlessly. I will (and have) take your property if you don't make the payments. We're not doing any modifications, workouts, deferrals or anything like that. When you're wanting to live in it, you get emotionally involved. Its no longer me taking your bad investment, its me taking away your home.

This house sounds like its trashed and needs roof work and repairs from the roof problems. This sounds like $50K in work to me. You'll have closing costs, too, and I suspect there are several points on that loan. That sounds like you need about a $320K loan to cover the purchase, fixup, points, and closing costs. The IO payments on that are $3,333 a month.

I guarantee you will need to hold it at least six months to do a refi and a year isn't out of the question. That's $20K in interest for six month, $40K for a year. The refi isn't free, either, so I think you're looking at a $350K loan, at best. You certainly don't qualify for that with your current income and its marginal with your higher income. At $350K and 4%, your payment is $1671 and a lender is going to want to see gross income around $6000 a month. The lack of income history is going to be a problem, too. The lender is also going to want to see some cash in the bank.

A HML is going to want to see some cash into the deal, too.

If you want to rent this, even with the 4%-ish OO financing, you need something like $3300 a month in rent. Is that possible?