Hard Money Lender Question

[Zachary Wurtz]

Hello, I am planning to buy my first investment property within the next 6 - 8 months. I was wondering when it comes to finding a hard money lender for rehab costs, is it a general rule to pay for a percentage of the rehab initially? Is it possible to find a hard money lender who will pay 100% of the rehab costs up front and then receive their return 6 months later during the refinance process?

[Mike Klarman]

If the deal metrics are solid and the total project cost is 70% of ARV, then you'll get 100% of the rehab costs in escrow. You do not get them at close.

For example.  You buy a house with these numbers:

Purchase: 100k

Rehab: 75k

ARV: 260k

Great deal right? 175k project cost. 260k ARV. 175/260 = 67.3% project cost to ARV.

You get the deal and start the loan process.  This is your first loan, so you have no exp but let's say your credit is good, maybe 750.  

Your loan terms would look something like 85% financing on purchase plus 100% rehab costs.  That equates to a loan amount of 160,000 (85k + 75k).

At closing the lender will wire into the escrow account 85k, you'll wire in your 15k plus closing costs.  When the deal is funded, you'll now own the property.  You do not get the 75k rehab in your hand however.  That is held by the lender's servicer/draw team.  As work is complete, you can apply for draws and you'll be sent the money dedicated to the completed work.  

So the lender will fund the rehab but you need to give the GC or Subs a deposit out of pocket so they can get going.  At least 10k, they have to buy materials and pay labor.  At the end of the rehab you get refunded your deposit out of the escrow account.  That last draw should be your 10k back or 20k back whatever you put up.