All Forum Posts by: Sharon Evans

@Nghi Le Yes, I’d appreciate any other options you can provide. This is definitely a small, local operation. They have good reviews from what I can see on the BBB and Google, but they’re not right for my business plan at this time. I’ve gone through almost every HML in the directory and they all have some horrific reviews attached to them. Needless to say, this doesn’t exactly inspire confidence, LOL. It makes it feel as though its all a scam. So scary.

@Nghi Le

Also, I’d be interested to know your thoughts on financing the rehab separedly, at a lower rate?

If I'm pre-approved for $50,000 in construction from a huge corporation, like Lowe's, at an interest rate of 4% for 36 months, it seems much smarter to finance the purchase with the HML and the rehab with Lowe's.

I should mention that there are some competitive advantages in working with Lowe’s because the material costs aren’t marked up, and their subs are more incentivized to complete the project on time because they’re being paid by Lowe’s, not me.

I understand being over-leveraged, but I would just pay the Lowe's line of credit off at closing, the same I would if it were financed with the HML at 12%. I guess I don't see why this method is any more risky than having it financed through the HML?

@Nghi Le Thank you for breaking the terms down for me! I agree that it is indeed confusing when different lenders use the same terms interchangeably. Luckily, I received a clarification email last night after breaking down and admitting that I was confused. Here’s the reply. “Our min purchase price is 100k, so assuming a 100k purchase price, we would lend 50-55% off the purchase price, so loan amount would be 50-55k, we do not lend on ARV, but purchase price, you would need to bring the difference. We don’t have any upfront fees as we go out and look at the properties ourselves”. Doesn‘t seem lIke a good deal. Thoughts?

@Ken Eck I downloaded it from a site (will PM you). If you have any skill with Excel, you won't have to pay for the version they sell...you can just modify it (see attached images). You can change the macro to either tell you the maximum purchase price based on your numbers, or to base your profit on a known purchase price. Hope this helps.

@Michele B.

The 2nd loan would not have any closing costs, as it would be a line of credit from the contractor, say Lowes. It could be paid off at any time during the 36 or 60 month term, the same way you would pay off a credit card.  But I understand where you're coming from. What is the down payment requirement on your loans? 

@Christopher Malone

Thank you so much!! I think this clarifies a lot. The problem is that I haven't spoken directly to lender yet, so a lot of this was cloudy, but I think the question that is missing from my scenario was the down-payment component. 

I downloaded a worksheet for calculating the numbers for a flip. In the calculator, it asks "LTV or Down payment?", which led me to believe that a down payment was not required if the lender is using LTV not ARV. I wasn't paying attention to the LTV reduction based on the loan balance.

@Christopher Malone

Ahhhhhh, I see now what you meant in your first bullet point. My response was contradictory to my example because I was thinking of what I was actually told by a potential lender about not lending on ARV but LTV. So let me revise, and clarify.

If the ARV is $150k and a lender will do 65% ARV, then they will loan $97,500. If the "as-is" value of the property is $100k, but I get the property for $43k, and it needs $25k in repairs, I only need $68k. In this scenario, what determines how much skin in the game I need? Aside for the lender points, buyer transaction points, and holding fees.

Alternatively, if the lender says they'll loan 65% LTV, then they will only loan $65,000. I'm still trying to understand how this eliminates any draw requirements. Maybe I should just call the guy and ask, LOL.

@Michele B. thanks for the reply!

Yes, loan #1 will be from the HML for the purchase price of $43k at the astronomical rate of 12% for a 12 month term. Loan #2 will be direct financing from the contractor of $25k at 3.99% for 36 months. Both will be paid off after selling the property.

It seems much smarter, to me, to have the $25k financed at a much lower rate, versus rolling it into a high interest HML. I understand over-leveraging, but in this scenario it's the same amount of money financed, just in two loans versus one. Why would I let the HML loan me $65k at 12% when I can get the rehab portion financed under more favorable terms is what I'm thinking. But maybe I'm wrong...

@Christopher Malone

Thanks for your reply, it's much appreciated my fellow Chicagoan :)

I will respond in order of your points...with regard to the purchase price, yes, I understand the 70% rule, and the purchase price of $43k was based on the exact math you described. I'm assuming a purchase price of $43 based on the 70% rule ($150K *.70 - $25K - $37K). 

1) In this example, the HML is lending 65% of the LTV, not the ARV. So, if the property appraises for $100k, they will loan $65k. Even with an ARV of $150k, they're lending 65% of LTV. This is an actual response I received from one potential HML. I'm not sure I quite understand your question, but maybe you can explain it to me better? This could be an area where I'm missing an important distinction.

2) The contingency would already be built in to the $25k at 20%. So, let's hypothesize that the repair is actually $20,000. 

3) This is where I need insight, so thanks for your elaboration. I've read articles on HML that give scenarios of receiving a percentage of the draw at closing. I need to know if this is practical, or just theoretical. Based on what you say, it must be theoretical. I am curious however because the same HML that told me they only loan on LTV, not ARV, said that this is the reason why there are no draws. I really don't understand WHAT that means exactly. Before I respond, I wanted to get some clarity from the BP community.

4) Can you describe what type of things could go wrong with GC financing? Especially when working with a corporation like Lowes. That info. would be handy, and could get my gears moving into thinking of other solutions :) 

Hi there! I'm still in the "information gathering" phase of the deal, but I've spent the last few days educating myself on hard money loans, the costs associated with them, and the problems that people experience in getting the deal done. My first flip in Chicago was financed using a 203(k), which is a drastically different product, so this HML thing is definitely new to me.

Please bear with me, and spare any ridiculous "that's the dumbest thing I've ever heard" comments, LOL. I'm just looking to bounce some ideas around, and make sure that I have a crystal clear understanding of how this works BEFORE I embark on a deal. So this is all hypothetical :). I'm trying to  avoid dipping into emergency funds and savings, so some creativity in this business is definitely in order. 

The idea is to start off SMALL on the first deal. At first, we were looking to do deals on properties in good school districts, which naturally drove up the possible purchase costs. Though this is a good strategy, in general, it doesn't really fit the model for what we're trying to do. I realized that buying in a good school district is more a "buy and hold" strategy than a "fix and flip" one. So, going small to start will reduce upfront costs, and allow us to build necessary relationships with lenders/contractors/agents in order to get better financing and pricing options on the bigger deals that we'll do later.

Here's a good, hypothetical, example. Please let me know if I have a solid understanding:

Looking at a property that's worth $100k, and a HML that will loan 65% LTV, which is $65,000, does this mean that I'll have to bring $35k to closing? No, and here's why...

Most HML base the LTV on the value of the property AFTER it's been rehabbed. So, let's say that the house needs $25k of work, and I'm able to purchase it for $43k. The appraisal comes out to $100k, which means I'll get the $65k from the lender, as described above. This leaves me with $22k for the expenses related to getting the property up to snuff and ready to sell ($65k - $43k). Well, I need $25k to get the job done, which means I'm $3,000 short. I have 2 choices: 1) Pony up the $3,000 out of MY pocket to get the job done (I don't need to bring this money to closing, but I do need to demonstrate to the HML lender that I have the funds to make it happen), or 2) Simply adjust my budget down by $3k.

Let's say that the lender charges the following:

3% origination fee ($65K *.03) = $1,950

Appraisal Fee - $500 

Pro-rated Interest (one month) - $380 

Title Search / Title Insurance - $175 

Pro-rated Property Ins. - $100 

Pro-Rated Taxes - $400 

Settlement Fees - $400 

Recording Fees - $100 

Wholesale fees (if applicable) - $500 

Since "No Money Down" is not an option, I'll will need to pay these fees up-front in order to get my $65,000. So, using this example, I'd need to come to closing with $4,505. Bring this money to closing, the closing agent pays the seller their $43k, and then I get a portion of the $22k in funds to access to begin the renovations. The HML lender will provide additional draws throughout the construction process.

So, here's the tricky part that I'm still working on, which is funding the construction throughout the process to keep the work going, because I don't want to wait on the draws to be reimbursed MY OWN money. I'm considering the following:

1) Work with a large contractor who is familiar with the HML process and has the capital to keep the job going while waiting on the draws. I found that LOWES is now in the GC business, and their pockets are deep, so you can imagine that they are going to pay their subs regardless of the lender draw schedule, which is great fo me. I spoke with a project manager who assures me that they do fix and flips all the time, and they are NOT worried about getting paid so long as there is a contract in place.

2) Use the HML to finance the purchase ONLY ($43K), and work with a contractor that offers financing, preferably at a lower interest rate than you'd get from rolling the rehab into the HML. For example, LOWES will finance the entire rehab at 3.99% APR for 36 months, or 60 months at 5.99% This way, I have guaranteed the work by way of financing. Simply make the monthly payments on the construction line of credit, and pay it off at closing, or continue making the monthly payments and use the money at closing to being another deal.

I'm still vetting this scenario, and as i said, I'm still in the research phase. Any thoughts on this? Did I miss something in the process? What would you do differently?