What is the best way to finance these deals?

Question

Hi all! I am trying to figure out the best way to structure financing on two possible buy and hold or wrap into owner finance deals. These would not be flips and the purchase would not fit the 70% rule. Both have positives and negatives that make each more, or less appealing than the other. I would love your insight and feedback on how to best structure financing so I am out of pocket as little as possible. Thanks for the help!

Deal 1: 4/2/2 SFR Nice quiet neighborhood, easy rental or owner finance area, low DOM

Purchase Price: $115k

As-is: $115k

Rental ARV: $150k

Repairs:$12k....0$ if the current tenants stay which they plan to do and have been there 7 years (I hope to wrap and OF to them)

Flip ARV: $160

Repairs: $20k

Rent: $1200 current, $1450 market

Taxes: $4000

Seller will carry 25% = down payment on conventional loan.

Deal 2: 3/1.5/1 Garden Style Townhome, possible section 8 rental

Purchase Price: $95k

As-is: $95k

Rental ARV: $110k

Repairs:$20k

Flip ARV: $130k

Repairs: $30k

Rent: $1495 top of market

Taxes: $3300

Seller will carry 25% = down payment on conventional loan.

Andrew Postell · Answer

@Scott Robinson nice to meet a fellow Texan here. My main concern here is the seller 25% financing. I think I would structure this a little differently than you describe. So you buy the property at $115,000, HML provides note of 75% of ARV = $112,500. Seller provides 2nd lien at the time of purchase of $12,000 or so?You can then refinance up to 85% of the ARV with a conventional loan. So you can refinance $127,500. Your 2 loans are = $124,500. Refinance in some closing costs. You are out of pocket maybe $3,000? You'll owe more on the loan but you just got a house fully renovated for $3,000 out of pocket! Sounds like a deal to me.Now on Deal #2, that one is too skinny for me. I would take a pass on that all together. Deals might be a little different in Midlothian but I'm coming out too much on that deal to make it worth doing.Hope this helps in some way. Thanks!

Scott Robinson · Answer

@Andrew Postell Ok thanks. Just emailed you.

Andrew Postell · Answer

@Scott Robinson no, file the lien from the seller at the time of purchase. You are purchasing with the HML if I understand you correctly. That the time you need the funds from the seller to do the rehab. So the 2nd lien is filed from the seller at the time you purchase the property. Hope that makes sense.

Scott Robinson · Answer

@Andrew Postell, so file the lien at closing of the refi, not the HML right?

Andrew Postell · Answer

@Scott Robinson yes, the 2nd lien would be able to be refinance as long as it is FILED AT CLOSING. If you file it at closing you can refinance with 99% of the loans out there. If you don't file it at closing then you would need to wait 6 months for a standard Fannie/Freddie type of a loan.

Scott Robinson · Answer

@Andrew Postell thanks. The 25% would be included in the agreed to sales price but I’m wondering if it would need to be “off the books”. Would I be able to refinance the HML if there is a 2nd note outstanding with to the seller? Accepted the request.

Andrew Postell · Answer

@Scott Robinson Oh, I think I may get what you are talking about now. So if the person sells to you for $115,000 and then ON TOP OF THAT sales price adds a $25,000 lien then DO NOT DO THAT DEAL. That means you are really buying the property for $140,000. Then rehab on top of $12,000...that's WAY over the price you should acquire the property for if the ARV is $150,000. Now, if the seller was saying he would grant you a $25,000 loan if you needed it...then ONLY as for a $12,000 lien for the rehab. I hope that makes sense. I'll PM you but yes, I absolutely know a lender in Texas that can lend up to 85% LTV. Feel free to tag with more questions here if you would like. People read these posts even months after they are completed so you might be helping out someone else. Thanks!

Tim Johnson · Answer

Deal one, you could make that work, but if you rehab cost is off by just a little the deal is blown.Deal Two, too skinny, pass on that one. Not every property is a deal, I have been looking at hundreds of them in order to find one.

Scott Robinson · Answer

@Andrew Postell thanks for the insight. Every lender I talk to will only do 75% on the refinance for an investment property. Is there someone else I should be talking to? Also, Im not seeing where the rehab money is your scenario above. The two notes are $124 plus the rehab $12k and that is $136k, I refinance at $127k (85% love to have that lined up) seems like Im in for the rehab costs myself which is fine, because there is no immediate repairs to be made anyway with the tenants in place until the summer and happy to continue as is. If you can do 85% or know who does, please let me know. Thanks.

Scott Robinson · Answer

Thanks, Joe. The ARVs are different because both properties would be rehabbed more if they were flipped, but since they wont be flips, I should have just left them off. I am wanting to keep as rentals or wrap and sell with OF and both would work for that scenario and cash flow a minimum of $300/mo after expenses and debt service. Loan terms on the refi would be conventional 30yr at 5.5%, hard money would be 100% at 3pts on the front end and 1%/month, seller carry still needs to be ironed out, which is one of the reasons I am here looking for advice, but seller did say he would carry the 25% down payment.Im thinking hard money for the purchase, get seller to sell for 75% of asking and carry they additional 25%. That should give me enough room to buy, rehab, & refi out and be left with the 25% note to the seller + the new conventional loan. If I need to bring more money than that too the table I can't/don't want to do either one. Of course, it is entirely possible I am suffering from Shiny Object Syndrome and need to be slapped in the face.