Possible Solution to a Friends HML in default - Deal Analysis

[Tony Pellettieri]

A friend of mine, aka my current real estate agent, is in need of assistance. I've spent hours trying to figure out a way to get creative and help her turn her failed project, which she just got served papers on yesterday, into at minimum a break even, for her, to avoid foreclosure. Ultimately this is not my burden and what ever happens does not affect me financially, but I still find myself up at 2am wanting to find a way to help her if I can, even if it's just providing her with a solution/way out.

A little over a year ago, she took out a New Construction HML for her first Real Estate Investment project. She purchased 2 acres of cleared land that currently has a small house that was built after the main house on the land burned down years prior. She sub divided the land into two separate acres, and began construction of a 1398 SqFt house on the acre with the small house. She planned to leave that small house, put a little work into it, and having it serve as a separate mother in law suite in addition to the newly constructed main house.

So far, the first acre has a septic tank, well, and a foundation built. Yesterday, she finally disclosed to me the amounts she owed on the HML and to the builder for the foundation work he's done. Below are the financials I've gathered with actual numbers, and rough Deal Analysis. This property is right next to our farm area and in a highly appreciating area, so Actual Post Construction Market Values in Deal Analysis at bottom will likely be higher than estimates when project is complete.

HML Loan Payoff $72,000 + Builder owed $30,000

Purchase Price of the two acres of cleared land & small house $93,000

Post Construction EMV of Lot/House #1: $379,000 - 1398 sqft single story ranch style @ $220/sqft + small House on 1 acre

Post Construction EMV of Lot/House #2: $307,000 - 1398 sqft single story ranch style @ $220/sqft on 1 acre

The builder had said the remaining amount, to complete the first house, he would require would be approximately $185,000. Factoring in the cost of the foundation to the amount quoted to complete construction, I estimate his overall construction costs to be $154/sqft.

I spoke with my GC we use for our Rehabs to see what he would charge to complete House 1 and Build House 2. He said House 1 could be completed for approximately $100/sqft, House 2 to build from the ground up $115/sqft.

Based on a rough SOW for the small house, I estimate it needs +/- $15,000 in work to improve the condition/rehab. The second lot, will also need a well/septic. Based on a rough analysis for a project timeline, I believe the total project can be completed in 5-7 months with the team I have available if we get involved in completing the work on the project.

Deal Analysis as a whole - Actual Costs may be slightly different but estimates should be fairly close

Post Construction Estimated Market Value - Lot 1: $379,000 Lot 2: $307,000 Total Estimated Market Value $686,000+

- $102,000 - Cost to payoff HML & Previous Builder

- $154,800 - Estimated Cost to complete House #1

- $170,370 - Estimated Cost to complete House #2: Includes New Well/Septic $7500, Impact Fees $2100, Permits $1000

= $427,170 - Estimated Cost to Payoff HML, Complete Construction on House #1, and Construct House #2

+ $686,000 - Total Future Market Value

- $20,580 - 3% Buyer Agent commissions as the current owner(Listing Agent) will be listing these properties without compensation

- $2,538 - Real Estate Transfer Taxes

- $1,500 - Settlement Costs Paid at Closing

______________________________________________

$234,212

- $27,900 - Payment to Seller for Down Payment made by seller to HML @ Origination (For her to break even)

= $206,312 - Potential Return before any Interest/Fees/Taxes/Etc

ROI: 45.3% RoR: 68.9% PM: 30.07% Acquisition/Exit: 8 Months

I've spoken to a few HM Lenders and ran rough numbers by them. They seem to be willing to lend on the project but so far they've required someone in the LLC to have 5 new builds under their belt as experience. I checked with my GC and although he's been involved in new construction and is confident in his abilities to complete the project, he is not able to show 5 completed projects. I'm also somewhat reluctant to using a HM Lender with the high fees they charge and I think utilizing private lending / or a JV may make more sense.

BP colleagues, I appreciate the time you've taken if you've read this far into my post and I kindly ask for your input on how I can help my friend avoid this unfortunate situation she's found herself in. We have some capital and are willing to invest but we need a plan.