Fix and Flip - HELOC advice/help needed

[Karl Kyler]

Hi fellow BP members,

I am currently working to secure a fix and flip.   I have gotten a couple of quotes that are up to 200k in repairs.  I am considering on doing some of the work myself to increase my profit margins.  

Here are some of the figues:

ARV: $420k

Repairs costs: $180k-200k

Purchase price: $120k

One of the contractors is a friend who suggested that I can do the work myself and he would help/jump in and do the things that are outside my abilities.  If this is the case, then he said material costs would run about $75k.

What I am wondering is this, what stops me from buying this home with a private loan and then opening a HELOC which can be used to buy the materials I need to fix the place up. A HELOC would be way less expensive than a hard money loan and wouldn't have any of the upfront costs.

Any help is greatly appreciated.

Karl

[Edward B.]

@Karl Kyler,

What is stopping you is the bank. They are very unlikely to open a HELOC on a property that is non-owner occupied and needs that much work, let alone a fix and flip. If you find a bank that is willing, more power to you. I would be careful about not disclosing your intentions, though, because you will be treading in mortgage fraud waters.

[Michael McCartney]

HELOC's typically lend 80% of the appraised value of the home less any liens against the house. So if the private lender files a lien against the house it might not appraise enough for you to buy all your materials and finish everything.

Example. If the appraisal comes in at $200k in its current condition less the $120k private loan you are left with $80k in equity. The bank would only lend you $64k which would not be enough.

You probably know this stuff but just in case you did not I wanted to throw my two cents in there.

[Karl Kyler]

@Michael McCartney Thanks for explaining.  I do know most of that but what I don't know is how the appraisal works with a private lender and how a bank that would issue me a heloc would see the appraisal from the sale.  I was under the impression they assess value based on the county assessement.

@Edward B. Awesome!  Thanks Edward.  

[Jonathan J. Miller]

Traditional Lender will not secure to a non owner occupied property.  You will need to work with hard money business lenders.

[Michael McCartney]

They will get an appraisal and you will have to pay for it, they usually run about $400 - $450. If the private lender does NOT put a lien against the house I'm not sure how that would effect things. If you're having a problem with the property not being "owner occupied" maybe you could move in there for a bit while the appraisal is going on and intend to make that your home and change your mind shortly after everything is final with the HELOC.

[Christopher Morin]

I would think your private lender would have to be very foolish to not record a security instrument in order to secure his investment. But if he did not, then maybe the bank would look at think it was owned clear, and may give you your 80% LTV HELOC. Of course, you may be committing mortgage fraud if you omit the private lender's interest.

And then, if the HELOC was granted despite the private lender's interest, the private lender may not be able to recover his investment because the HELOC would force him into 2nd position. So he'd lose beaucoup money if the deal went south and had to foreclose.

[Rick Pozos]

I think what most people mean is that they are getting a HELOC on THEIR OWN HOME to fix up another property. They are pulling their equity from their homestead property or from another property that they own free and clear. It is not from the home that they are fixing up.

BTW 200k in repairs sounds like way too much for a home that is worth 420k. Is it really worth 420k?? Where is this property?? I would not take on a 200k rehab as one of my first flips. Too much room for things to go sideways. If it really is a good deal, wholesale it. Make a few bucks and go on to the next one.