How to structure a deal for hard money financing?

Question

Hi all,

I have identified a property that I would like to make my first investment, if possible, and I am hoping to lean on the knowledge of the board.

The property that I have identified is an REO that I have been led to believe I could purchase for 50% of the list price, if I could close quickly.  I understand, the basics anyway, of how hard money loans work, but I am wondering if I could get some help on how to structure a deal.

I have been working as a realtor for the past year, after being laid off for over a year prior, so my cash reserves are limited, however, I have a strong credit score, and have about $20,000.00 in credit card availability.

What I would like to do is structure a deal that would cover my acquisition costs, and then have milestone draws to pay for the repairs after they are done, which would pay off my credit cards to free up reserves for the next milestone draw.

Acquisition Cost, including Closing Costs would be around $30,000.00, and I anticipate the repairs will run about $40,000.00.  A home in the same neighborhood recently sold for $98,000. which was the appraised amount.  However, it is not in the same conditions that the property I am looking at will be.

Thanks for any advice,

Caleb

Jon Holdman · Answer

Some HMLs will lend for both purchase and rehab and base the loan on the ARV.  Some require specific down payments.  You will need to speak with HMLs in your area and find out what terms they offer.

Assuming these numbers are correct and using HML terms that you could get here (the lenders I have in mind do not work in your area) it would look like this.  I'm using $100K as ARV to simplify the calculations.  The loan amount would be $70K, based on the $100K ARV.  At closing, points ($2800), underwriting fees and other closing costs would be deducted from the loan.  Say about $5000 total.  If this is your first ever deal the entire rehab escrow would likely be held back, too.  So the net proceeds from the loan would be $70K - $5K costs - $40K rehab escrow = $25K.  You would need to bring about $5000 to closing.

Then, you would start making monthly payments of $875, beginning a month after closing.

You would do the work on the house and get it inspected.  You would get the rehab money in "draws" as the work was completed and inspected.  Typically one draw when its half done and another with the work is all completed, though this is negotiable.  Some lenders might give you one chunk of the rehab budget up front, especially once you have some experience.

You do need an exit plan.  You say this is an investment, so I assume you want to hold this as a rental (vs. a fix and flip.)  This is going to be troublesome because you're unemployed.  That makes it REALLY tough to get a loan.

If you are planning to do a fix and flip then when you sell the property you pay back the HML.  If you sell for $100K, you'll pay about $8000 in commissions and other costs.  And you'll pay back the $70K you owe on the loan.  That would leave you $22K.  You have that up front $5000 into the deal, plus (say) six months of payments for a total of about $5250.  So you end up with a profit of about $11,750, pre-tax.