Hard Money Calculations for Dummies???

Question

So after doing a few wholesale deals I am getting the sudden itch to rehab a house. I just came a cross a lead from a divorced women who is selling here house and the asking price is starting a 50% ARV so I with only cosmetic repairs aside from the water heater and ac unit that were stolen. I know after negotiations I will get it well under 50 percent. I seems like the perfect flip. One I may be able to fix flip and still sell at about 70-75 percent for a quick fat profit. I was thinking hard money may be the way to go since I no my market will allow me to unload fairly quickly.

The question is how do you calculated these loans I have figured out some formulas but I still can understand when the points get charged, and what the payments are monthly. I have found most lenders in my area are requiring 20% down 75% LTV 15% interest and a 4 points this is just one out of like 15 different lenders the. The house is a 4/2 2,600 sqft on 5 acres ARV $158,000 asking price before negotiations is $80,000(I know I could close at about $68K-$73K) and it is not a short sale, listed, or  preforeclosure etc...

What formulas do you use?

Justin S. · Answer

For example purposes, let's assume you are purchasing for $100,000.

75% LTV =100,000 * 75% = 75,000
4points = .04 * 75,000  = 3,000
15% interest = 75,000 * .15 = 11,250
monthly payment = 11,250/12 = 937.50

This assumes the lender treats value as purchase amount and the house would at least appraise for purchase amount.  Some treat value as after repair value.  Make sure you clarify.

Jon Holdman · Answer

Points are subtracted out of the loan amount.

I'm not sure I understand exactly how much you're borrowing.  Let me assume that the lender is going to loan you purchase price plus rehab minus down payment.  And that they will go up to 75% of ARV.   So:

Purchase $40,000
Rehab $10,000
Down payment: $8,000
Loan amount is $42,000
That's under 75% or ARV, so you're OK on the loan amount.

Points will be 4% of $42,000 or $1,680.  You will have some closing costs, I'll guess those at $1,000.  The repair escrow would typically be held back at closing and you would get that later, as the work is completed.  So closing looks like this:

Purchase: $40,000
Costs: $1,000
Points: $1,680
Repair escrow: $10,000
Total: $52,680

Loan amount: $42,000
Cash needed at closing: $10,680.

Manny Cirino · Answer

Eric I also never seen the point of charging up front but what I am seeing from everyone's feed back is that different HML structure there loans different. So I will ask more questions.

Rob my initial goal was to make all of the money for my fist flip. But sometimes I come across some very good deals from my leads. It very hard to watch another investor buy them. So now that I have this one I am not sure if wholesaling for another year is what I want to do.

Jon I absolutely agree!!! I love to make my spreadsheet it helps me make sure I analyzing all angles. Every deal is different so I like to go through all details thoroughly.

Jason S. · Answer

Opted in for the analyzer - I like how you explained each variable/input. Looks like you do not do business in my state - but the analyzer is useful either way.

Jon Holdman · Answer

A thread here is that HMLs can be different.  These aren't RESPA loans and aren't nearly as uniform as residential mortgages that are covered by RESPA.  So you really need to discuss with your lender exactly how they're structuring things.

If, as Ann points out, the points are capitalized, then they are still effectually taken out at the start.  If you're borrowing $100K with four points, and the points are subtracted from the loan amount, you get $96K, pay interest on $100K, and pay back $100K at the end.  If the points are capitalized into the loan, then you get $100K, but you pay interest on $104K and pay back $104K at the end.  That's exactly the same as getting a $104K loan and paying 3.846 points up front.

I never use a pre-built spreadsheet for any of these calculations, or anything else related to all the various calculations I do.  In another post, someone said "you must have a ton of spreadsheets on your computer, Jon."  No, actually I do not.  I always create one on the fly for what I'm trying to calculate.  If its just to answer a question here, I delete it.  If its for an actual deal, I'll save it specifically for that deal, and may update it later.  This may seem like more work than building one and using it over and over.  But it has advantages.  When I build from scratch, I always understand what calculations are being done.  I make the calculations do exactly what I need them to do.  I don't worry about variations that might need to be handled if I'm trying to create a general spreadsheet.

In the words of Lazarus Long (Robert Heinline, really): "Anyone who cannot cope with mathematics is not fully human. At best he is a tolerable subhuman who has learned to wear shoes, bathe, and not make messes in the house."  I think the is especially true for a math (arithmetic, really) intensive business like real estate.  Building your own spreadsheets will let you gain a better understanding of how the math works.  If you don't have excel and don't want to buy it, OpenOffice.org has a free office suite (yes, I have a slight and distant relationship here.)

Ann Bellamy · Answer

I also have a free deal analyzer spreadsheet on my website.  You can change the LTV, rate, points etc, and can enter your rehab budget.  It estimates closing costs based on NH and MA transfer taxes, but can be adjusted for your location.  If you plug in the numbers, out pops your profit.

As far as paying points at the end or the beginning, typically, if the lender lets you roll the points into the loan, those points are capitalized, which means you are paying interest on those points as well as the principal amount of the loan, so while there is upside as far as less cash out of pocket upfront, the downside is it makes the loan more expensive.  Sometimes it's worth it.

Jason S. · Answer

I have seen that error before - I think you just need to fill in every field.  Give it a try because their analysis sheet that comes out as a result has more variables than the input sheet - I think it is good to look at to understand the whole process.

Eric M. · Answer

FYI, it may be unusual but some HML's (like me) charge their points on the "back end" so the points are not deducted from the loan amount.  You get the full loan amount up front.
I never did really see the point of lending money to someone only to have the give some back to you in a fee right away.

Rob Gillespie · Answer

:mrgreen: Manny,

I would keep flipping until you can afford to fund your own deal, but with that aside, here is my advice.

I never wnat to be into a home for more than 70cents on the dollar with buying it, fixing it, holding it, points and everything! I drop that to 50cents on the dollar in the hood!
If you are getting private capital, make sure you go with a minimum of a 24 month balloon without a pre pay penality. Good luck!!

Manny Cirino · Answer

Thanks Eva I appreciate it!

Hard Money Calculations for Dummies???

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