Funding a Rehab for a seller financed deal
Member since 2021 · 2 posts · 0 votes
Funding a Rehab for a seller financed deal
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Ryan BlakePro Member
Lender · TX · Member since 2018 · 936 posts · 713 votes@Tristan Bulot Why would the equity still be the seller's? Are you closing on the property and putting it in your name? That would mean you own the property and any equity in it would be yours. The seller will probably want a lien on the property to protect their interest but that would be it.
You will need to find a lender willing to take a second lien position on the property. These can be hard because if anything goes wrong, the first lien holder with be in position to recoup all costs first. There are lenders that will take a second position but you are going to pay extra in interest and fees for it (in most cases).
I see you are paying $0 and need $55k for your rehab. How much are you putting towards the rehab or are you trying to borrower all of it? That will make a difference too. If you have no assets to guarantee a loan before and if this is one of the first deals you are doing, it will be difficult because of the high risk of default.
I think you best bet is to put together a detailed pro-forma with the tools on this site and visit with family members who may have cash or equity in a home, then with local investors in the area, then with hard money lenders, then finally with local small banks. It will be an uphill battle but if you believe in the project, it will be worth it.
4 Replies
- 4yJared HottleBusiness MemberReal Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
Do you have any other assets you can pull equity from like a principal residence you could pull a HELOC from? I would reach out to hard money lenders and see if they will do unsecured loans. Be ultra-transparent on your finances and liabilities and plan you have and see what they can do for you.
Jared Hottle Real Estate59 Reviews - 4yRyan BlakePro MemberLender · TX · Member since 2018 · 936 posts · 713 votes
@Tristan Bulot Why would the equity still be the seller's? Are you closing on the property and putting it in your name? That would mean you own the property and any equity in it would be yours. The seller will probably want a lien on the property to protect their interest but that would be it.
You will need to find a lender willing to take a second lien position on the property. These can be hard because if anything goes wrong, the first lien holder with be in position to recoup all costs first. There are lenders that will take a second position but you are going to pay extra in interest and fees for it (in most cases).
I see you are paying $0 and need $55k for your rehab. How much are you putting towards the rehab or are you trying to borrower all of it? That will make a difference too. If you have no assets to guarantee a loan before and if this is one of the first deals you are doing, it will be difficult because of the high risk of default.
I think you best bet is to put together a detailed pro-forma with the tools on this site and visit with family members who may have cash or equity in a home, then with local investors in the area, then with hard money lenders, then finally with local small banks. It will be an uphill battle but if you believe in the project, it will be worth it.
- 4yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
What about a HELOC on your own property? OR borrow from your retirement plans.
I am going to warn you about the dangers of having that 1 year balloon. If there is any way to extend that to 2 or 3 years, I would do so. If you have delays with contractors, or find a big problem like I did with termites (look for my "big circus tent" blog post), it can take so much longer than you expect to get the job done. If they are savvy, they could repossess the house, with all the repairs you put into it.
If you cannot extend it, try and get your financing lined up before you need it. Some lenders will do HELOCs with no interior appraisal, which can save your bacon if the house is still under internal repairs. Once you have holes in the sheetrock, loose wires, cracked window panes, and so forth, the house will not fall nicely into "lendable" condition. It is probably not lendable now, with fire and smoke damage. You will need to prioritize, and fix those conditions, so that the house *does* become lendable. "Pretty" can come later.
Keep your credit in great shape (sometimes hard to do while renovating) so you can get the refinance done. I'd get financing done as early in the process as possible...that balloon tells me so.
My current seller financing rates are 6% interest only. My payments on my $300k mortgage are $1500 and payments on the $400k mortgage are $2000. In your situation, making payments while rehabbing, with no rents coming in, are rough. You could ask the seller to let you put them at the back of the year.
Good luck with this one. It gets my pulse racing, having done renovations on tight timelines. You can do it! You must control the deal and not let it control you.
- Member since 2021 · 2 posts · 0 votes4y
Thanks for all the information. I have a 4 unit building but not much equity to pull from it quite yet. I think I may stray away from the seller financing and just stick a "cash" offer, and use a hard money lender. It seems this route would be much easier, cheaper and even less risky than having unsecured funding and the head ache it would cause even trying to find unsecured funding. The reason I was trying to swing the seller financing deal was to get into this flip with the least capital I possibly could.
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