Rehab loans when you own house free and clear?- Westhampton NY

[Stephanie Lella]

Hi BP,

To make a very long story short… I have the opportunity to take ownership of my mother's house and have the house free and clear; it's completely paid off. It is a single story ranch, 3 bedroom with full basement valued in the $397k neighborhood. With work it could be worth $500k +. The house needs serious rehab. I am thinking at least $150k. The lay out of the house is so poorly done, it's tempting to just knock the entire thing down and start over.

The house is located in Westhampton, NY, a very rich beach community where houses just minutes away sell for over $5 million. My house, after renovation, could rent for 20K for just the four months in the summer, or could be $3k/month year round. I am in a pretty good financial situation but I am still only 25 yrs old, and I don't want to deplete all my savings on rehabbing the house. In my research, it seems like most rehab loans are wrapped into a pre existing mortgages. Since I won't have one, are there any loans out there for just rehab?

[Jon Holdman]

Assuming you're not planning on moving into this place a hard money lender may be willing to lend for rehab. Its not that HMLs only lend for purchase. Rather, they simply want to be in first position. If you own the house free and clear and borrow from a HML, they're in first position.

You will need a plan for repaying the HML. Those are short term loans. Perhaps a refinance or some such.

Another option might be a refi or line of credit on the property from a bank. That will be MUCH cheaper than a HML.

You should consult with an accountant before doing anything.  There are significant and negative tax consequences if your mom gives you this house while she's alive.  Specifically, if a property transfers at death, the heirs get a stepped up basis based on the fair market value at the time of death.  When its transfered while the giver is alive, your basis is the giver's basis.  If that basis is lower, which is very often the case, you will pay more tax when you sell.