Hard Money Details

[James H.]

I have found a HML that will lend up to 70% ARV at 12 percent. The closing costs are 3000 (which includes one point at closing) and there are 2 points due at payoff. Draws for rehab require inspection at a cost of 125/inspection. Now, I have to foot the bill for the rehab costs and the work be inspected before I can get the draw. HML will allow me to do the work on my own. The terms are for up to 6 months with no minimum holding period.

My strategy is to rehab and hold. I can refinance up to 75% ARV with no money out of pocket other than the hard money fees. If the appraisal comes in lower than expected, I am responsible for coming up with the cash to cover the difference. I am trying to visualize the process sequentially in my mind and was hoping that some of you in the BP nation could share some insight as to what to look out for that someone new to hard money might overlook.

Thank you in advance for your help!

[Jon Holdman]

Theoretically, it would work exactly like you describe. I think you have a typo in the first paragraph and you owe the HML $52.5K, not $56.5K.

But there are two major flaws in your scenario. One is that you can buy a $55K house that needs no work and is worth $75K. The problem is that, even if there are other comps that support $75K, you are creating a new comp at $55K. The appraiser will have a really hard time justifying the higher value when you did nothing to the property.

The second flaw is timing. You're unlikely to find a lender that will do the refi in the time you're hopeing. Its probably going to be six months or a year before you can refi. Even if you pull it off in six months, you will have six months of interest payments.

Further, in the time between when you buy and when you refi, your new $55K comp will be affecting other valuations. That will in turn become your comps on the refi. So, even if an appraiser comes up with the $75K value up front, the later value may well be lower.

But the basic idea is exactly what you describe. The HML/refi strategy is a way to get into rentals with less cash than a straight buy. I have done exactly this, but not in the last couple of years.