Greetings BiggerPockets community,
We want to share our story and all the lessons we’ve learned and what we continue to learn along the way. We found ourselves frequently relying on faith that we can make this deal happen, and so far have been blessed. However, we’ve learned a ton along the way and hope this helps others who walk through some complicated deals. So, here it is...
For those interested in the numbers up front:
Purchase Price: $478,000
Money down: $278,753
Loan amount: $225,000 @ 10.99% for nine months interest only. Three months interest required, no prepayment penalty.
ARV estimate ranged from $715,000-$819,000 depending on which Broker Price Opinion we went with. Either way, not bad.
Rehab budget: Initially set at $75,000. If we were to pay for a GC for everything we want to do to the house, it will probably be closer to $100,000, but we know how to do a few things, so it will likely be less.
We owned a SFR in Arlington, VA for eight years and renovated it inside and out, top to bottom. We ended up selling it in four days from list to contract and have no complaints. We did almost all the work ourselves and those lessons are worthy of a whole blog by themselves, but needless to say, we had about $300k in equity after the sale. We wanted to turn that money into much more as we moved to Tampa. As coincidences go, we received a listing from a Tampa-based wholesaler the same day we listed our home. After talking it over with my wife, I called the agent and put a deposit down the next day after doing a FaceTime walkthrough. Somehow, we knew this was the right deal for us.
We took a trip down to Tampa a few weeks later and got to walk the property with the owner working in her office. A bit strange, but we ended up chatting with her and learned a bit about the area. During the walk, it was quite obvious the home was filled with stuff, and lots of trash. The floors were almost completely covered and odor of dog and dirt hung heavy in the air. Hardly any lights worked and it honestly felt a bit like a horror movie. We did recognize some of the home’s potential based on its incredible location, its size and the price. It seemed the bones of the home were good and the challenges we would face in remodeling would be achievable. Now to the craziness.
We first attempted to obtain a conventional mortgage because the home was advertised as “passable” for inspection purposes. After a couple days of back-and-forth we learned the wholesaling company was only willing to do a double close (they bought the property form the owner, Jane Doe, and sold it to us a few hours later. This is how they make their money). Because of the double close, no Fannie conforming lender would be able to assist us since they have to deal with the actual owner on the deed. So, we went the hard money route. We spoke with about ten hard money lenders explaining our goal of “delayed financing” the property in order to secure it, do some fixes and move in and make it our residence. We were told time and again, we cannot occupy a property that’s under a hard money loan.
At the same time, we were told by the wholesaler, we had to have an LLC since they, by Florida law, are only able to do business-to-business deals. So we decided to create an LLC in Delaware and hired a registered agent to help. This was an excellent idea because they not only made the process easy then, they were a huge help during a later problem. The LLC process was pretty easy. Deciding on the name took longer than anything else, but once we settled, it was less than an hour of filling out web forms, reserving a web site, setting up email and such. We spent about $400 all said and done.
We found a hard money lender that, for whatever reason, was sympathetic to our lack of knowledge and wanted to help us out. That might seem naive to say on our part, but for all we put these folks through in this process, they more than earned the small amount of money they will make off of this deal. I truly believe what the rep told me when he said, “I know we will be doing more business in the future and I want to make this work for you guys.” And he and his team delivered.
One thing we were very careful to do is be completely upfront with everyone we dealt with from start to finish. We didn’t mislead or withhold anything from anyone. We knew what we wanted was going to be challenging for others to work with, but we never wanted to lose anyone’s trust. That’s too important to us.
So, the lender agreed to do the deal, we had our new born LLC and things looked great, for a minute. We were hit with the flurry of document requests, which we did our best to stay on top of. We scheduled inspections and provided all those reports to the lender and later, insurance companies. It turns out, the house failed the Florida mandated four-pointe inspection for three reasons, double-taps in the electric panel, corroded water pipe at the water heater and a leak in the roof. Despite those issues, the lender required us to carry both builder's risk and general liability policies for the duration of the loan, which ended up being nine-months. I found out, those policies are far more expensive than your classic homeowners policies, far more. I got five quotes and may have thrown up in my mouth a time or two. Oh, and the home is in a flood zone, so tack on another $1000 for flood insurance!
With the days passing by, document after document being emailed (54 emails is all) over a period of eight days, we were a day away from closing when the lender informed me they were satisfied and their underwriter had approved the loan. This was less than 24 hours from closing, which mattered because the penalty for going past closing was 1% of the sale value per day, not ideal.
We got notice the next day, 30 minutes before closing, to wire the $278k to the title company. Our new bank kinda sucked at doing this and made us an hour and a half late to closing. The title company also bares blame for the extremely late notice. I know you can usually fund after closing, but they were being sticklers about having the money. Whatever.
So we closed on the house one week ago under our LLC and have begun the cleaning and quote process. We've had the electrical and plumbing fixed, emptied the place of trash and debris and have done our best to get the smell under control. Also, we went looking for better funding. After talking to multiple local banks in the area and enjoying the sounds of heads exploding when I went over the situation, we finally found someone who knows what the hell he's talking about, hopefully.
Our new lending guy told us we can essentially sell the property from our LLC to us, use a Home Style loan with no seasoning required since its a sale, not a refinance and pay off the hard money loan in the process. The LLC would recoup the equity from the sale, which will allow it (us) to reinvest that money into future deals. We would pay off the hard money loan and retitle the property in our names and get to move in. Everyone's happy and we will finally get what we were after. Since we essentially prepaid the required three-months interest, we will wait until then to do the sale so we wont pay two loans at the same time. We will also remedy the remaining issues from the four-pointe so we can get normal homeowners insurance.
This is where we are today. If you have any questions, feedback or warnings, we’d love to hear them.
Dan
