Where to get money for a rehab deal (Private Lender's POV)

[Wendell De Guzman]

Here's a question BPer's:

Do you need money to buy a house to fix it so you can flip it?

Where do you get the money?

Bank financing is not a good option for short term rehab money because they usually do not lend on properties that need renovations.

Hard money lenders become a viable option specially since they generally do not look at your credit and they can lend you anywhere from 60-70% of the ARV (After Repair Value). Here's the secret: hard money lenders are, for the most part, really hard money BROKERS (HMBs) and they get the money from people like me (the private investors). I invest my money and I get a good return and HMBs get their POINTS (usually between 3-8% of the borrowed amount).

From the lender's Point of View (POV), you will get money for your rehab deal if you have the following:

1. Good deal - a property acquired at 80% LTV is NOT a good deal. I don't care what market you are in. An 80% LTV does not give me enough cushion or margin of safety if something goes wrong on your project. If your deal is marginal, either don't do it, or be willing to pledge another property as collateral.

2. Experience - I would go with a rehabber with experience vs. one without. What if you're a beginner? Partner with an experienced rehabber or get an experienced GC as part of your team. Lenders love to lend money to experts so partner up or hire one if you're starting out.

3. Cash Reserves - do you have some cash reserves to pay the monthly interest and front the first part of the rehab? At closing, I instruct escrow to release the money to acquire the property but the repair money is put in escrow. The first part of it (say 25%) is released only upon completion of the first phase of the project. So, you need to front some of the repair cost.

4. Skin in the Game - let's say you provided a good deal (house worth $200K and you need $100K to acquire and rehab it), I generally require that you have some "skin in the game" or some money you can lose if something goes wrong with the rehab. I sometimes require 6-months of interest to be prepaid upfront (in the example, that's $6,000 for a 12% interest p.a. 1st mortgage) or 10-20% downpayment.

And lastly, but not the least...

5. Knowledge - For example, I need to know your exit strategy on the deal (are you reselling it or renting it) and how viable your exit is. For example, if you plan to resell the property, I need to know the average DOM (days on market) in your area. If that's longer than 180 days, then most likely, that's a rental area not a resale area. I might require you to have a credit partner so you can refinance and cash me out if in case, you can't sell the house. This is where I love to deal with active members of BP because they have some knowledge and they are not ignorant about real estate.

Do you have a deal you need to fund?

Describe it here and I will tell you if private lenders will likely fund it or not.