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Funding For House Rehabbing
Hi All, I am new to rehabbing although I have many years experience as a construction/project manager (building, rehabbing schools). I am interested in finding out your experiences for financing a rehab project to resell for a profit. How do/did you fund your first few house flips, including the rehab costs? Any advice would be greatly appreciated!
Abbigail Brown, welcome to BP!
While you wait for everyone to answer you, I suspect you'll get quicker information by doing some searches here on BP, for terms like rehab funding, funding for flips, hard money, private money, construction loans, rehab loans, etc.
The topic has been discussed exhaustively here, and continues to be discussed almost daily.
Good luck!
wonderful! I will, thank you!
My business partner and I went to every small / regional bank in our market and asked to talk to someone in commercial lending. We discussed with them our business plan and discussed what lending options the bank had to help us. We were shot down many times (young, inexperienced, little capital), but we continued to polish our presentation and what we discussed during this meeting. Finally, we found a lender willing to lend to us (90% of purchase cost and renovation costs up to 80% ARV). We receive the rehab funds in draws and the bank sends someone to inspect the progress to make sure the project is on track. We have been using the lender ever since then and have developed a great relationship that has been key to our growth.
I realize these options are not in every market, but I always recommend people try before going directly to the hard money loan route. I actually wrote a blog post with some tips about getting bank financing:
Hi Abbigail,
James couldn't have summed it up better - that was exactly my experience too. Work with small local banks and develop a relationship with someone in the commercial lending department.
Provided the numbers for the project work, they'll allow purchase and rehab funds. Still needed the basics: 20% down, good credit, cash reserves, but because they'll probably hold the loan in-house, they have a lot more flexibility.
Good luck!
- Tom
James Vermillion
Just curious what year you started your search for the commercial lending relationship.
I know those relationships changed for a lot of investors between 2007 and 2009.
Originally posted by Christine Olivias:
I've done business with the owner previously and have been watching the site grow. It's Free while in beta.
Good to know. Thanks for sharing.
Gene, we started looking at the end of 2009 and closed our first loan in 2010. We are getting the same loans from the same lender today (in fact we close on one Friday).
Thanks everyone for your insights!
Originally posted by James Vermillion:
I realize these options are not in every market, but I always recommend people try before going directly to the hard money loan route. I actually wrote a blog post with some tips about getting bank financing:
James, kudos for your deal making. It is not easy breaking into the commercial lending space. I've inquired at my regional banks and have been told multiple times based on my industry code I don't belong talking to anyone in commercial. They always set me up with someone in small business. And, within minutes they say no because being a real estate investor is a speculative business the SBA won't insure. I've never even gotten far enough to be asked about sales or credit. And I've tried over a dozen times.
What sort of rate are you paying? What are the fixed costs (points, appraisal, lien recording, underwriting fees)?
I read your blog and feel humbled. I have a solid business plan, great credit, low DTI, high income, years and dozens of homes rehabbed/flipped with my company all for a profit, lots of equity and collateral, etc. I'd be delighted to find a bank willing to offer a 50% LTV as long as the cost of capital is below 9%. But I can't even break through the red tape to talk to someone in the commercial lending department. kudos again. I'm jealous.
Others might frown on this but it's what got me off the bench and helped me do my first deal.
My first deal was a small one but I was able to fund it with $10k+ of savings, multiple maxed out credit cards, a $15k construction loan, multiple loans from family friends, and probably $10k worth of sweat equity on my part.
Toughest and riskiest deal of my career so far, but the most rewarding and the most lucrative (not for long, though). Knowing the numbers work enables one to make those risks. Also, being young and "dumb".
Originally posted by Huggy Baird:
James, kudos for your deal making. It is not easy breaking into the commercial lending space. I've inquired at my regional banks and have been told multiple times based on my industry code I don't belong talking to anyone in commercial. They always set me up with someone in small business. And, within minutes they say no because being a real estate investor is a speculative business the SBA won't insure. I've never even gotten far enough to be asked about sales or credit. And I've tried over a dozen times.
What sort of rate are you paying? What are the fixed costs (points, appraisal, lien recording, underwriting fees)?
I read your blog and feel humbled. I have a solid business plan, great credit, low DTI, high income, years and dozens of homes rehabbed/flipped with my company all for a profit, lots of equity and collateral, etc. I'd be delighted to find a bank willing to offer a 50% LTV as long as the cost of capital is below 9%. But I can't even break through the red tape to talk to someone in the commercial lending department. kudos again. I'm jealous.
Thanks Huggy. I am surprised you are unable to get someone in commercial to at least sit down and discuss with you, perhaps our difference in market is the reason. As for the loans here are a few details (from the last loan we closed):
- loan origination - 1%
- appraisal - $325
- attorney fees - $475
- recording fees- $52
- interest rate - 6% (int only for 6 months)
Hopefully the helps.
James Vermillion when you pitched getting a loan to the banks, were they more concerned about numbers surrounding the potential homes or with your personal finances? I presently have enough to put 10-20% down and have an excellent credit score However, my debt-to-income ratio is way too high for a traditional bank to loan to me because my wife recently lost her job. From your experience and knowledge, would a local bank be willing to overlook the high debt-to-income ratio if everything else looked good?
I looked at hard money lenders recently and couldn't bring myself to get involved. In my analysis, when all was said and done, they would have taken so much out and made as much as I would have on the deal, I decided it wasn't worth going the HML route.
William W., they definitely looked at both, although I had the benefit of having a business partner (both of us had full time jobs). If debt to income is your only problem, I would suggest giving it a shot with a couple banks to see. Sure, they will consider your debt to income, but if everything else is solid they may be willing to lend to you (though it may be a small loan at first).
I can tell you that when we started the lender would not have considered lending more that on that first property (about a $100K loan), but now they are willing to allow us to borrow significantly more (and all other financial factors stayed stable accept for the amount of money in our business account).
I certainly understand your concerns with HMLs, so I would talk to some local / regional banks and see what they have to say.
James Vermillion thanks for the quick reply. Given my circumstances, it seems a local bank is most likely the best route for lending from what I can tell then.
I have been running analysis on homes around $100-125k, which is pretty cheap for the Austin area. I recently tried to purchase an REO that was listed at $110k but the bank required a prequalifcation letter from a major lender which I was not able to get solely based on debt/income ratio which I understand.
I will start looking at putting together a packet for presentation for a local lender.
I purchased my first rehab from a home vestor franchise owner. He had a separate business doing hard money loans. Often the experienced wholesalers will be able to also point you in the direction of a HML or potential other sources as it is in their best interest to have more potential buyers for their wholesale product.
Naz M.
Are you a private lender that lends out your own funds or do you broker hard money loans.
James Vermillion did a wonderful job in his perserverance to get conventional funding from a local community bank. While that can be a difficult path as James pointed out, you can certainly get great rates and terms these days.
I have always stayed clear of banks and gone with private lenders (of course hard money lenders are also options as are JV partners). I do this for many reasons.
1. I hate all the paperwork involved in a bank loan.
2. I can fund quickly with private money as opposed to bank funding and access to money quickly is worth the higher price tag.
3. Bank lending will have limitations whereas private or hard money funds can be done on many projects all at once.