All Forum Posts by: Tim Ivory

@Tom S. Thanks Tom!

Hi Tim - I've successfully used seller financing as a second lien and the HML first lien a number of times. That said, it depends a lot on the lender, the deal and your personal financials. It's always been a case by case basis.

Sounds good. May I ask the role my personal financials would play in such a scenario, ie, what role would my income and cash reserves take in their decision process to allow the seller in second lien? Am I asking them to take on more risk by having someone else hold a lien position? At the end of the day, with partial seller carryback, I'll likely only need a hard money loan to finance around 40 percent of the purchase price, and pay off the seller after the property sells. As such, there should be more than enough equity in the property to recoup there investment.

For me, the first lien lender wanted to make sure I had sufficient cash reserves to complete the rehab project. In fact, many times it was required I had the downpayment funds in advance, close on the deal, then execute a seller financed 2nd mortgage which effectively reimbursed me the down payment funds. 

May I ask if the cash reserves were for paying the hard money loan payments and not in fact held in reserve for the renovations themselves? Right now, I'm calculating 4 months of reserves of interest only payments. I hope that is enough.

About the downpayment funds, I assume I would have to pay the downpayment to close on the hard money upfront. For instance, if I wanted a 75K loan, I would need to show up on there doorstep with atleast 7.5K (10%) of the purchase price before they would lend the money. Are you saying some would allow me to pay the downpayment afterward?? That would be nice.! 100 percent of the renovation value is covered in a lot of places, so I would not need to make a deposit here, however, it is unclear to me if the majority of hard money lenders cap the maximum loan to value for BOTH the downpayment + the repairs to 75% maximum loan to value.

Apologies for the long reply. Thanks again.

@Tom S. I'm sure it depends, but how would having the owner in second lien position work on just a residential single family property. Would the hard money lenders generally allow the seller to be added in the lien, allowing the owner to carry back some of the financing? How safe is it to be in second lien position from the sellers perspective. I need to make sure I can confidently say you will get pad no matter what. Cheers

The deal goes as follows

Purchase Price around 130-140K with an ARV of 225K needing 25K in repairs. I have 10K to financing this deal, thus capping a Hard Money loan at 65K with a $6500 downpayment (assuming 90% of purchase cost) plus 2800 in reserves. She will carry back a note for the rest, payable after sale.

This is the structure of the loan with the repair cost embedded within the loan, which I can now modify.

Fix N Flip - HML @ 65K - 6 Months (Worst case 12 months)

Expenses

• Buying Costs (2350)
  • Appraisal (450)
  • Home Inspection (500)
  • Title Insurance (600)
  • Title Company (800)
• Holding Costs (3000)
  • Taxes (477)
  • Insurance (500)
  • Utilities (1800)
• Financing Costs on 65K Loan, eats up my 10K (5000 Cost - 10K tied up)
  • 6500 DP (Equity I get back at closing)
  • 3900 in interest (closing fees)
  • 1000 misc (at closing)
  • 2600 in reserve
• Selling Costs - (16800)
  • Realtor (15.500)
  • Title Company (800)
  • Appraisal (500)
  • Attorney (500)
• Repair Costs - 25K (lumped into loan, deducted from .75 percent ARV)

Total Expenses = BC (2300) + HC (3000) + FC (15000) +SC (17K) + RC (25K) = 62300

Loan Cost - 10K available for DP and Reserves = Max HML Loan of 65K 

Loan @ 65K - 6.5K DP = 58.5K - 34250 = 24250 as Down payment to Glenda

• Loan Interest (3900) (Points embedded into interest)
• 10% Down Payment (6500)
• Holding Costs (3000)
• Buying Costs (2350)
• Repair Costs (25K)
• Downpayment to Seller (24250) Owner Finance the rest

Loan @ 65K - 3900 - 6500 - 3000 - 2350 - 25K - 24250 = 0

Scenario 1 - Even Split of Profit,  Loan with Realtor Expenses

Total Expenses = 127K Purchase Price + (BC (2300) + HC (3000) + FC (15000) +SC (17K) + RC (25K) = 62300 DP) = 189,000

Net Profit = 225,000 - 189,000 = 36K - 10K* = 26K

Seller Profit = 127,000 - 100,000 - 26K

*My cost out of pocket needs to be deducted from Sale to reach profit!.

Scenario 2 - Even Split of Profit, Land Contract or Mortgage Note, No Realtor (Add 30K to table)

Total Expenses = 142K Purchase Price + (BC (2300) + HC (3000) + FC (15000) +SC (17K 2K) + RC (25K) = 30000) = 174,000

Net Profit = 225,000 - 174,000 = 51K - 10K = 41K

Seller Profit = 142,000 - 100,000 - 42K

Same but With Realtor Fee (Higher chance of selling faster) (Winning scenario so far)

Total Expenses = 134K Purchase Price + (BC (2300) + HC (3000) + FC (15000) +SC (17K) + RC (25K) = 30000) = 181,000

Net Profit = 225,000 - 181,000 = 44K - 10K = 34K

Seller Profit = 134,000 - 100,000 - 34K

*I calculate seller net profit by the following. 80K purchase and 20K already paid in repairs, thus reaching 100K.

It all depends on what she is willing to accept. If her lowest if 142K, then I'd pursue with LC or Mortgage Note with No Realtor, etc. If she needs more, than at most I could try to wholesale it.

@George Despotopoulos

Thanks for answering my question. I am ecstatic about the answer. I've been structuring the deal with a cap of 75% on both the purchase and rennovation costs, now it seems I could potentially offer the seller 25K more in the offer, making it much more likely she will go for it.

Alas, the more I consider, a HML may not be the best way to approach this deal, but I will offer it to her just in case she want money in her pocket before any title work is done.

George thank you! Bare with me, I need to do as much research and comparisons on my own for now before reaching out to HML to not waste there or my time. Cheers.

@George Despotopoulos

Thanks! So it sounds like the full loan amount for both acquisition and rehab could be higher than the advertised max LTV, is this correct? I need this to be as clear as possible to structure my first deal.

So, 80-90% of purchase price (not exceeding max LTV) + any repair costs (which are held in escro, dispersed in draws), both rolled into one loan. Or, is the combined loan capped at the maximum loan to value amount?

May I ask a rather fundamental question? When using a hard money loan that includes 100% of the rehab costs, are we in fact dealing with 2 loans?

Say the purchase price is 100K, needing 25K in repairs, with an ARV of 155K,

Assuming they loan with a Max ARV of 75%, would they loan me 90K assuming I put in 10K, in addition to an extra 25K dispersed periodically? Totaling 125K altogether, which is above 75% of the ARV.

Or, as they say, the rehab is blended with the purchase, both cannot exceed the maximum LTV of 75%?

If they are separate, is the rehab loan somehow different in interest rate and/or points?

@Doug Pretorius @Marc Winter Thanks again guys.

Yet another thing also occurred to me while breaking down the numbers, the Selling cost after the repairs are done, specifically, the realtor commissions. I'll likely list on the mls with an agent. It would be worthwhile to develop a relationship I think. However, 7 percent of 225K is still $15,575! I'm asking myself if it is possible to save this amount too. Couldn't I list it myself somehow, paying a small fee, or even simply sale as a FSBO, utilizing a 2000 marketing budget or what not? I could save 14K. What are your guys thought on the subject, the logistics of selling oneself? I know there are many awesome realtors here and I've compiled a list with dozens of entries of the benefits of working one a good realtor. Alas, I gotta ask the question.

The seller and I could either pocket 34K each, or 41K each, depending on whether or not we go with a realtor. I'm leaning to go with a Realtor to be on the safe side, regardless. Furthermore, there is also always the chance the property will sell higher than my, hopefully, conservative ARV estimate which could offset the cost.

That said, at the end of the day 34K with 10K down seems pretty decent, especially if I don't have to get a HML (less risk). However, I'm asking myself if this is the best use of my money and time. I could be patient and wait to find a deal not unlike how this one first began.

For instance, she bought the property at auction for 80K. I could technically afford that amount now with a HML, with a 10 percent downpayment. 225K - 40K (in repairs) - 80K (loan) -25K (Holding, closing costs) = 80K profit. This is particularly true if I end up getting a HML for 59K in the deal scenario I'm structuring now using hard money, which isn't that much less than the 80K I'd have required at the start if I'd managed to find the deal sooner as she had done. Not to mention, this project could take 6 months of time.

However, this is assuming I could buy an auction property or even REO with a HML. I know some banks will even finance their own REO's and I spoke with someone recently who got a loan for an auction in the same county as I. So, it seems possible.

There are some angles I still need to explore here. Namely, whether refinancing is an option after the rehab is done, the other options mentioned here, and finally,  I feel I need to explore the worst case situations a bit closer. 

Finally, and a bit off tangent, I found the Fix and Flip calculator on bp a little lacking. It doesn't take into account any financing. Furthermore, I've yet to find a calculator where I could explore financing with additional seller carry back (say a note for 50K after the sale) using a fix and flip strategy. I might have to look into, at some point, in possibly hiring a developer to create my own proprietary calculator. They seem fine, but just not how I'd structure the scenarios. I kind of just want more options and flexibility but maybe I'm overlooking something. Thanks again guys. Cheers.

I'm working out each of the possibilites one by one. So far, I like the land contract idea since it means the seller and I will save on closing costs and the cost of getting the loan itself, around 16K, which can then be split evenly between us. However, I still want to present the HML idea with her since having 20-30K at closing and an additional 105K after the sell, might appeal more to her.

I wonder though how she would respond to be placed in second lien position with a note for 105, which is higher than the HML of 59K. I can't picture the hard money lender taking second lien position. Perhaps, indeed, the best course would be a land contract after all?

She gives you the deed, you give her a mortgage, the title company should be able to put all of that together no problem.

Awesome. I like it when its simple. To be clear, this simple mortgage exchange is in fact not a land contract, correct, since the title would not be held in escrow, this right?

I'm piecing it together bit by bit. It's quite fun actually. When I'm down breaking down the numbers, I'd like to share it here for a second set of eyes. Cheers

Responding to Marc's earlier post, does the seller need to sign the memorandum of option? May I ask why I should not record the option the actual option?

Consider: who collects on insurance if the place burns down 95% through your rehab? Who gets to pull permits? Who deals with a lien or judgment the seller acquires on the property during your fix up time? What if the seller refuses to close with you once the work is done? What if he dies during that time? What if you are not or cannot finished with the reno and the option expires?

I am in agreement that perhaps getting title to property would make things easier and is less risky.

@Marc Winter

I would have an attorney create a wrap-around on that so that if things go south, the seller can foreclose the loan. If you do a straight subject to, they won't have any standing.

Good point and I believe I understand what you are saying, except the wrap-around part. Is this another terminology for putting her in 1st lien position with a note. In this case, can the note be considered a mortgage?

Get the title or contract for title:

Okay! I am excited to give this a try. May I ask what you mean by "contract for title", and how is that different than simply getting the title? The later, I assume means I am added to the title and the sellers name then moves to 1st lien position on the note, off the title.

But from personal experience, I'd might do a land contract in which the seller becomes the bank for a time, until you satisfy the contract, and the deed is held in escrow by a title company.

Another scenario is to have the seller form an intervivos revocable trust, put the property into the trust, and assign certain beneficiary rights to you, along with a resignation of trustee (assuming the seller becomes his own trustee) and a quit-claim of any beneficiary interest to you, all of which is held in escrow by your title company.

This is why I love biggerpockets. Even more options to consider, excellent! I have roughly familiar with them but will explore each of these scenarios with a bit of study and see which one is frankly the easiest to do, while also being the easiest to explain.

On second read, I also really like the land contract idea as that seems pretty close to what I had in mind since she owns the property outright. The deed is held in escrow, she becomes the bank (though deferring payments), and released at sale. Is this the exact same thing as simply signing a regular purchase and sales agreement with a note being the payment method upon sale, and again, moving her to 1st lien position?

Cheers, and thanks so much guys. You have both already been very helpful.

@Doug Pretorius I love your idea about refinancing, paying the seller, and keeping it as a rental! Such good advice. I only wish I was confident I would be able to refinance since I'm self employed without the W2 income verification conforming banks require. I wasn't legally obligate to pay taxes since my net income didn't reach their threshold. This year I will need to file taxes and look forward to doing it to have something to show banks for income verification. I will certainly try to refinance it when it is completed, perhaps a portfolio credit union would be open to refinancing, if not, then I'd simply sell it.

One caveat however, she owns the property free and clear. In fact she bought it at an auction 3 years ago and never got around to finishing the repairs! In this case, should I simply approach this as a purchase with a note payable upon completion of sale, or one year, with no interest and no lease payments. As security for the seller, I would then of course put her in 1st position lien holder with a mortgage. I live in a deed of trust state, so in effect, upon signing the contract, she deeds me the title in my name, which I in turn hand over to a title company putting her in 1st lien position, receiving a mortgage from her via owner financed through a note payable on sale, which in then would be held until sale is completed. Does that sound about right?

You bring up a good point about coming up with the additional 15k that I don't have a solid answer for at the moment. This amount would be too little for a HML, so I would think I would need to get a personal loan. However, this is giving me pause since I'm sure W2's as income verification would be required, hence the same position as not being able to refinance. Some lenders may verify, with no income verification, but with a higher interest rate, but this is something I need to do more research on and very much welcome any suggestions on any reputable companies I could work with.

On that note, I am roughly familiar with a federally insured Title 1 loan that would even be applicable to properties one does not own! Which could theoritically even work if I took lease or even option out on the property. Coincidentally, it is also good for 25k. However, again, the caveat, those W2's!!! lol Not to mention probably even more loops to jump through conforming to government criteria.