I've done the Homestyle loan a few years ago and am currently looking again and I've got 4 HS quotes coming in from different lenders. The rate difference is usually pretty reasonable, maybe around 0.5%. You can also use the loan as an investor, but rates are higher and so is the down payment. There are other fees as well, like draw inspection fees, additional appraisal at the end of construction, and construction fees or other fees a bank may charge, so you just shop around like you would a normal loan, but get familiar with all the different fees they charge; try to figure out how to compare apples to apples.
I know nothing about San Antonio, but it sounds like you've done a good job finding a contractor. In my mind, that's the hardest part.
Hi Alec, if it's not going to cost you too much money and you can afford to do it on your own dime (and time), then I don't think it's worth getting a renovation loan for. Especially if you can live there and even rent a couple rooms while you are still renovating ... that means you aren't holding up revenue because of waiting for the renovations to be finished - this allows you to take your time, etc. etc.
If you can throw a little more money at it sooner and get it all done faster, you can use a HELOC to pull that money back out once the work is done, based on assuming that the property value will have increased because of the work you did.
I love the Homestyle loan (which I think is better than the FHA 203K option), but only if you need it. All renovation loans will cost a little more, but worse than that, you have to go through the red tape with the bank, which can feel a bit cumbersome ... you have to ask for permission to change your plans, and you are supposed to wait for their approval, etc. etc. In the end, you'll get a better rate and get all your money back if you do it yourself.
Also, one drawback to the HS loan vs FHA - they don't have a "streamlined" HS loan, compared to the FHA 203K Streamlined version. This is a loan that is $35K or less, and they allow you to work on your own project. The "Full" version of the FHA (over $35K) and the HS option require hiring a contractor that will be accountable to the bank, and you have to find a contractor that is willing to do this type of project ... many stay away from it because they often won't get paid quickly by the banks and it hurts their cash flow. You might get charged a higher rate by the ones that are willing to do renovation loan projects for this reason.
It's totally worth it in some situations, but it sounds like your situation can be handled "in-house" so to speak, so if I were you, I'd pursue it that way.
Good luck!
I did this loan back in 2012. The renovation was around $100K. I'm a big fan of it ... I mean, VERY big fan of it. Having a clear understanding of this loan will allow you to bid on properties that you otherwise wouldn't be able to even think about buying. If a property needs repair, you can't get financing without using a rehab loan, and I really do NOT like the FHA options, for many, many reasons. I suspect the Homepath program was canceled because the Homestyle program is so much better, there wasn't a point to having both.
Here are a few lists of things to consider ... it's a long list, but also very incomplete. To be honest, tomorrow I'm probably going to think of 100 more things I could have added to the lists:
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So, here's a list of pros:
1 - You can buy a run-down property with this loan that you otherwise couldn't buy with standard loan options
2 - It's one loan, not a bridge loan, not a hard money loan, not something you have to re-fi later (although you can re-fi later if you want, of course).
3 - Rates are close to the same as comparable rates for non-rehab loans, maybe sometimes exactly the same
4 - You can purchase as primary or secondary or investment property with similar down payments as non-rehab properties
- For instance, 5% down for owner-occupied, single family home
- When you get a duplex, triplex or quadplex, your down payment goes up (or your LTV goes down, same thing)
- Investors can use this loan, although the downpayments are higher, but that's the same for investor loans on non-rehab properties anyway
- Here's a link to an August 2015 update sheet that gives you all your purchasing options and down payments for each option: https://www.fanniemae.com/content/fact_sheet/homes...
5 - Because you are purchasing a property that needs repair in the first place, you will probably end up with higher equity in the home than the rehab money that was required to repair it. That's the whole game with flips, right? Whatever you spend on repair should be worth (hopefully) 2x in equity when you're done.
- Of course, you should be able to get the home that is in disrepair at a discount BECAUSE it is in disrepair, but that's already a given, right?
6 - There's less competition for you when you can use this loan
- Less people know about it
- Many people self-eliminate from this type of purchase for multiple reasons - they want their dream home, and therefore aren't interested in a fixer, or they don't know enough about fixing homes or are intimidated by doing repair work, etc. ... you've just taken out all of those buyers from even looking at homes that would require a rehab loan
- This also means you can get even better deals, not just because the home is in disrepair, but because fewer buyers are looking for this type of home
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FHA comparison:
Most of the above is just advantages of rehab loans to begin with. The advantages over FHA are the same advantages as a non-rehab loan gives you ...
1 - FHA loans add 1.75% mortgage insurance premium to the loan (sure, it's amortized over the whole loan, but if you re-fi, you just lost that money for no reason, as you still have to pay that extra amount off).
2 - FHA has restrictions to what you can use the money for, Homestyle is less restricted.
3 - FHA is more bureaucratic, they take longer to approve of draws, longer to pay back the contractors, and are generally a pain to deal with. I say this out of the research I did, not experience, because I chose to go with Homestyle over FHA. Homestyle depends on the bank you work with, and should be a smoother process.
4 - FHA requires MI for the duration of the loan, Homestyle drops automatically at 78% LTV (or I should say, Conventional drops at 78% LTV). Not to mention, the PMI on conventional loans is less than the MI on FHA loans to begin with.
5 - FHA is restricted to owner occupied, I believe ... say you want to turn it into a rental later on, you can do that with conventional, but not with FHA. You'd have to refinance. And this also means investors can't use FHA.
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Things you should do BEFORE you look for a property to use this loan on:
1 - Shop around for lenders that offer this loan - shop around a lot, get rate quotes and compare fees. Every lender says they're great. I say prove it. I prefer no points, I've studied points and in the long run I don't think it's worthwhile, it takes something like 10 years to pay off ... you'll probably re-fi before then anyway. Just find a good lender you can rely on, in fact get two just in case you run into a problem with the first one (delay in financing could hurt your financing contingency in your purchase and sale agreement with the seller).
2 - Study the Homestyle loan. The rehab portion of the loan can not exceed 50% of the ARV (After Repair Value). There is a ceiling to the loan amount that is allowed. There is also a ceiling to the loan amount you can qualify for. Figure out all of these numbers so you know what you are playing with when you look at properties. Ask questions to lenders, do research online, etc. etc.
3 - Find a contractor that you can work with. It's required. Fannie Mae won't let you do this loan without a licensed, bonded, insured, etc. contractor that will give them a bid that they approve, etc. etc. One contractor is required on the paperwork, although they can sub-contract to whoever they want, just like any contracting job.
- This is extremely important, and it might be one of the trickier aspects of this loan - you have to get your bids together quickly so you can submit them to get approval for financing, and if you have to wait a week or two for your contractor, your financing contingency deadline could expire and you lose the deal.
- Ideally, you should be working with a contractor that has experience with projects using rehab loans. The way it works is that they do the work, then request a draw. A 3rd party inspector comes out and checks the work and decides how much of the requested draw is valid based on the work that is done. Then they submit their paperwork to the bank, who then takes however long they take to send a check (should just be 1-3 days if the bank has any experience with rehab loans - stay away from any bank that will take a week or two or longer - just ask them). This is a problem for contractors' cash flow, and that can impact your project if the contractor constantly has problems making ends meet.
- If you want to do any of the work yourself, you just have to be up front with your contractor. I did this, and it worked out fine. I even explained to the bank that I'd be working a bit with the contractor, and it was no problem so long as the contractor still took responsibility for the overall project - the bank will hold the contractor ultimately responsible, and they won't risk a large project with someone who isn't a contractor, but the contractor can use their judgment in working with you.
4 - When looking for homes, it's nice to be able to have a contractor go with you to check the home out. It might be hard to get one to spend that time helping you out, though. Any help from someone that has some rehab experience can help you understand the potential of a house that needs rehab work. Otherwise, you can always bid on a property and get out of it during your 10-day inspection period if you find out the repairs are more expensive than you thought they would be. Either way, i would use the 10-day inspection contingency to bring your contractor out - you can still do an inspection, but since you'll be rehabbing the house, it seems like that's less helpful than having your contractor going through the house, they should be able to call out most of the same issues anyway.
5 - Get ahold of a rehab list from the bank - or from a contractor that has done these loans. It's an eye opening list that will help you understand how rehab bids work. It may help you when you are looking at a house as well, it will remind you of all the things that you should be looking at for repairs.
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One thing to know about during your bid process - give 45 days at least. But really, ask your lender. If they have experience with these loans, they should know how long it will take, and use that as your closing period. You can always ask for an extension with the seller, and they usually would want to give it to you, they DO want to sell the property. That being said, WASTE NO TIME. Get on top of everything, and QUICK.
Like I said, I'll probably think of 100 more things to add to this tomorrow. This is all I've got for now. I can't imagine looking for properties without being armed with this loan - it's my favorite real estate weapon!
Joe - look into minisplit heat pumps. They cost a bit up front, but are the most energy efficient heating over all the options, and they also provide air conditioning. They essentially pump heat from the outside to the inside, and can pull heat even at low temperatures. The heat pump can be reversed, hence giving the effect of AC as well. Check out www.ecomfort.com.
Usually you put one in the main area of the house, which covers the largest square footage. For the bedrooms, they should generally be fine, except for maybe the most cold months - depending on how cold it gets in that area, those rooms might need a sub-heater, but only for those couple of colder months. You can get energy efficient sub-heaters at Lowes or Home Depot.
The up front costs of getting those installed will probably pay off in the long run and are better options than buying space heaters. Search for reasonable contractors, though, as many want to buy the equipment and mark it up a lot, on top of their already high rates for installation, so definitely shop around for that. I find the solo guys are the most reasonably priced.
Other suggestions:
Use LED lightbulbs everywhere possible. Sometimes there are rebates on LED bulbs, you'll have to do some research.
Check for energy loss - insulation, windows, doors - quality and potential air leaks. These are usually bigger factors to keeping heating / cooling costs down than getting a more energy efficient heating system.
You can get a blower test to see how air tight the place is, and you might be able to get an energy audit that does that as well as checks on everything I've mentioned, suggests upgrades, etc., and you can pick and choose what's worth spending money on. I think they cost around $400, but in Seattle there's a program for energy efficiency that offsets that cost and also offers rebates for many of the suggested improvements, including adding minisplits, replacing windows and upgrading insulation. Maybe there's something offered in PA, you could ask around (your electric company is a good start).
Hope this helps, good luck!
@Brian Burke - Thanks, I made some calls after reading your response, and then I checked out your podcasts - would love to connect with you about some other things as well, I'll send a private message.
In the meantime, I found that in WA State, which maybe others already know, if you're doing flips (legally defined as selling a house within 12 months of purchase), the name on title has to have at least one owner that is a WA State licensed and bonded contractor (to protect the buyer by having someone to sue if there's a defect or whatever). Seems pretty prohibitive, but that changes what we can do for setting up our company structure. We're going to do one Delaware LLC that owns one WA State LLC with another one of the owners of the WA State LLC being a WA State licensed & bonded contractor. We'll stick with just that for flips. For rentals, we may look more into the Series LLC strategy, but we're not doing that yet.
@Paulina Purnama - Yes, I thought about that as well, it's a good point - I think you're echoing what my second post was about. In Scott's podcast, they discuss this as well - it seems like a bit of a dilemma. He says to never buy in your own name, so your name never appears anywhere. But if you're just starting out, how can you do that, unless you are starting out with partners and buying using an LLC? And if that's what you're doing, how do you qualify for the loan? Do banks even offer conventional financing for investors that are not individuals? It defeats the potential of getting conventional financing, which of course is your best loan, ESPECIALLY if it's going to be a long-term hold instead of a flip. They then talk about moving property from your name into an LLC (i.e. through quitclaim), which I guess is fairly common, but your name is still on record. So yes, that's a dilemma, I don't really see how you make that work unless you just completely skip conventional financing altogether, which seems unfavorable to beginners.
I'm interested to learn from anyone that has insights on how an LLC can purchase properties at more conventional rates, if that's even possible. I guess I should read Brandon's book ... :)
So, to follow up on this thread - I found someone else in the forums that found a lender for a full construction VA loan using iMortgage and FGMC (I guess to do some kind of bridge loan) - used in combination.
https://www.fgmcconstruction.com/
The problem we're having is that the guys at iMortgage are just not very responsive. We're trying to get a basic quote, and it's like pulling teeth. Maybe you'll have more luck with the guys in your area, if there are any ... they also only offer the streamlined version (up to $35K), and currently don't have anyone certified (?) to do anything bigger ...
I'm amazed at how little lenders know about VA construction loans, many of the lenders we talked to just flat out said they don't exist, and obviously they're wrong. I think you just have to follow any leads you can and bang on a lot of doors.
In the meantime, though, here's another possible strategy:
Do a conventional Homestyle rehab loan (you would qualify for less, but it wouldn't be THAT much less), and once it's all fixed up, re-fi into the VA loan. You might even pull out some extra cash on increased equity while you're at it.
One more comment - this may not really solve the issue for someone purchasing their own home in their name and then at some point turning it into a rental. You probably wouldn't qualify for the loan to begin with unless you do it in your own name. And it might be harder to move it into an LLC if it's a Delaware series LLC - you might be more likely to be called on the note (DOS) than if you just create an LLC in your state that is in your name that you quitclaim the deed to. Either way, the loan has to be guaranteed by you personally, or I would think the lender would be much more likely to call the note. I don't know yet if there's a way to move a property like that into the series LLC strategy without that risk, I haven't explored that myself.
So from that sense, maybe the guys arguing that you don't need an LLC have a point when it is someone that is just starting out and buying properties in their own name. How would you qualify otherwise?
To be researched ...
So after reading this entire thread and being swayed on all different sides by mostly good points and debate, I'm still coming to the conclusion that Scott Smith's original strategy that was presented in his podcast was correct:
Set up a Delaware Series LLC to be on title for flips
Set up a Delaware Series LLC to be on title for holds
Set up a Delaware Series LLC for operations
Set up an LLC in your state that is owned by the Delaware Series LLC for operations
That's a total of 4 entities.
If I'm following Scott Smith's logic correctly on this, here are the benefits:
1 - Delaware companies are anonymous, the only way to know who owns them is to file a lawsuit, so you don't know what assets are there to go after until you have already committed to the lawsuit.
2 - At least in Washington State, you are required to register your business in Washington if you will be conducting business transactions (i.e. operations) in the state, and they require disclosing the ownership of the LLC. The ownership, however, can be another LLC from out of state, hence the Delaware Series LLC for operations to own the WA State LLC, to keep things anonymous.
3 - Every series allows for pretty much unlimited separate, independent "cells" that are used for holding title on each property so there is no asset overlap and the liability risk is always kept only within the individual "cell" that is getting sued. It's treated as a separate LLC within the parent series LLC. In that regard, the liability of each asset is protected from eachother within the series.
4 - You only have to file one set of taxes for each series LLC. This should solve all the problems for everyone that was complaining about having all the accounting and tax headaches of multiple LLCs (i.e. one per property), right?
5 - By holding one series LLC for each category, you keep the types of taxes appropriately separated (capital gains taxes for flips, income taxes for holds) so the IRS can't tax you the higher of the two rates on all your properties.
6 - By having a third operating LLC, you can run all funds, income, expenses, etc. through that company (like a property management company), so you only need one set of books (I'm not 100% clear how this works yet, I'll be talking to a CPA about this sometime in the near future), although you still need to account for the expenses of each property just like a property management company would anyway.
7 - Every "cell" in a series LLC can have its own operating agreement, it's own set of ownership, it's own agreements with 3rd parties, profit splits, etc. etc. - essentially eliminating the need for new joint venture LLCs for every project with partnerships, etc. Do your own deal, or do deals with other people, every deal can be a different cell in the series LLC with it's own DBA. Just put flips in the flip series and holds in the hold series, and run all the money through the operating LLC.
8 - When setting up a new cell for a new project, you don't have to do a new filing, you just add a DBA for that cell with minimal filing and pretty much no additional fee, making this process extremely simple - just have templates set up (I'm not sure on these details)
9 - The operating company becomes more of the target for lawsuits because that's who renters make payments to and have disputes with, and it's the only local LLC. If they push to sue the ownership on title, the name on title is the name of the cell LLC (not the series LLC). I'm sure they could eventually figure it all out to sue the right people, but it's harder to figure out - the cell LLC is still anonymous, and it's in Delaware, so they have to sue in Delaware to sue the cell LLC, even though the partners may be in WA State or wherever. Again, they wouldn't know what assets are held before committing to the lawsuit. It's easier to sue the operating company, but the operating company doesn't own any of the assets. And it's also anonymous, since it's owned by another Delaware LLC. I don't know the details of the relationship between the operating LLC and the flipping series LLC, but I'm assuming there's a similar relationship where the money goes through the operating LLC and not the flipping series LLC.
10 - Operate your rentals as an employee of the operating LLC (i.e. you work for the property management LLC when you are doing things like repairs, etc.) - that should separate you more legally and give more protection from anyone being able to go after your personal assets as though you've pierced the corporate veil - remember, the asset would be owned by the series LLC for holds, so it's not in your personal name.
I'm probably missing a few points here. I know Scott mentioned DSTs, I'm just not as familiar with how trusts work compared to business entities.
I'm also sure I don't have everything right - I haven't actually done any of this, this is just my understanding / impressions so far, and I'll be looking into it more because I intend on doing different kinds of deals with various partner set ups, etc., and this does seem to simplify, protect and give me a lot of flexibility with any project type I want to try.
I talked to a Delaware lawyer about the Delaware series LLCs, and the only flag he brought up was that series LLCs haven't been tested in courts much yet. Delaware courts are more progressive for business laws since they are already used to Delaware's progressive business culture, but other states could still possibly throw out the series protection. I thought California already basically doesn't recognize series LLCs. So you probably have to research how your state is treating these to evaluate if you want to try it out.
Two questions:
@Brian Burke - You've done 700 properties - if the series LLC I've just outlined above is correct, doesn't that make sense for you, instead of separate individual LLCs for different properties? Wouldn't the series LLC strategy reduce accounting/tax/government filing headaches for someone investing in that many properties? In other words, what am I missing?
@Seth Mosley - I'd love to hear about what you learned from the private consult you mentioned in your last post, and anything else you've learned since.
Thanks for this thread, I'm trying to help my sister and brother in law with a VA loan / property, and am trying to find info on a lender that offers VA rehab loans. At the VA website, it clearly states that:
VA home loans can be used to
http://www.benefits.va.gov/HOMELOANS/purchaseco_eligibility.asp
That being said, we're on the hunt for lenders that offer VA Rehab loans, i.e. the second on that list. If anyone knows of any lenders that offer this, we are interested. If we find anything, I'll post what I find here.