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REAL ESTATE Rehab Finance Question

JScott

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Looking for some info from any investors who rehab and hold...

I have a friend who is looking to borrow about $100K. He has found a house that he can buy for about $60K, and with about $40K of rehab, the ARV would be around $130K.

He'd like to borrow the $100K for a couple months, buy and rehab the place, and then refinance to pull out the $100K (to pay me back), and then rent the place out for income.

My question is: in today's credit environment, it is realistic to think that he'd be able to refinance and pull out the $100K he puts in, assuming the ARV is appraised at $130K and assuming he has very good credit (which I've verified he does)?

My concern is that while he'll have nearly $25K in equity on the refinance, he won't have any of his own capital tied up in the property, so I'm not sure how lenders will look upon that.

Thanks!
 

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Diane Kennedy

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IMHO, there isn't enough profit potential in this deal to make sense.

ALWAYS figure 20% (minimum) cost overruns on remodeling and with holding costs (the cost of the money while renovating - figure it takes longer there as well and then the cost of holding until it rents), there isn't much room for error here.

Just back of the envelope calculation, I come up with a potential cost of $120K and if it's only worth $130K, $10K is just too small of a reward.

My experience with cash out refi's (which this is) is that you're lucky to get 75% LTV and then they often need to be seasoned for 6 months or so. In today's climate, it's even harder.

I'd say pass on this, both as a buyer/rehabber and as a potential investor/lender.
 
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JScott

JScott

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Thanks for the feedback, Diane...

The one thing worth pointing out here is that my friend isn't interested in selling after the rehab. He wants the house as a long-term buy-and-hold investment (it should easily cash-flow for him after the rehab).

His goal is to acquire, rehab and rent the house with none of his own money, which if his numbers work out (and if he can get 75% LTV on his refi) sounds as if it should be possible (though as you mentioned there might be a seasoning period).

Agreed though that as a flip it is very thin, and it may be too thin for what he is planning as well...
 

EasyMoney_in_NC

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If your friend is going to be re-fi'g the place after construction is complete, and Dianne's calc's are accurate (in terms of cost), the rent would have to be quite high to be able to cash flow. Value to cost aside, is there really any money in this deal? At today's rates, your probably talking about a $750-800 PI payment + taxes/insurance ($200?).
 

phlgirl

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The scenario you describe is very similar to the business we run here in FL – buy cash, rehab and then cash out refi (so that the property cash flows without any of our money left in the deal).

I have to agree that these numbers are very tight. The cash out refis are getting harder and harder to find. As Diane mentioned, it is extremely likely that you will only be able to get a 75% LTV. I know of one source for an 80% and it is with BOA – they only allow 2 per person (investment properties) AND their appraisers are BRUTAL (often bring back very low numbers).

At 75% of 130k, you are looking at 97.5k. What about the closing costs (at purchase time and at refi time)? What about the fees/interest which surely you are charging the 3rd party to borrow your funds? 40k sounds like a fairly heavy construction job – this is likely to take some time.

Not only do your construction cost estimates need to be very conservative (20% buffer, as Diane said, is a great rule) but you need to be very sure that your appraisal will come back at 130k or more. Banks are really pressuring appraisers these days to keep their figures conservative.

Finally, the rent is key, in my opinion. You need to know that in this market you will be able to rent said property for more than the PITI.

In my opinion, as the hard money lender, it is just as important that you know the market (rental, appraisal, etc.) for this property as it is for your investor. After all, you may end up with the house.

I think your friend is on the right track. If done right, you could both make some money. He/She may just want to look for something a bit deeper.
 

AroundTheWorld

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As many here have already covered the numbers, I'll pass on that part and move on to the question.... how can it be done in today's environment?

(Assuming the numbers DID work...)

You can go to a hard money lender. They may not give you "all" the desired cash out, but some of it. Then you do the rehab. Now, 4 to 6 months later, you can go to a bank and get a refi - - rather then a purchase - cash out loan. A refi (again, assuming the numbers are there) can be enough to pay off the hard money lender w/out purchaser going out of pocket.
 

jimculler

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Sep 14, 2007
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Consider the cash out refi, if he can document enough income (full doc with good debt ratios), or can prove self employment (occupational license, CPA letter etc....). In other words, if he has NO employment, then scrap the refinance idea completely. Also, if he has to go stated, you will want him to be able to verify at least 2 years of some sort of self employment, or at the very minimum a j o b.

He will have some money in the bank for verified assets right?

You have checked his FICO scores to verify credit is over 720 right? Dont trust some online scores (we call them FAKO). www.myfico.com is the only website I have found that actually match what we lenders and brokers are pulling.

If his credit, employment status, and liquid reserves check out, you could get 75% LTV with no seasoning requirements.

That being said it would obviously take some time to rehab the home prior to you ordering your appraisal.

Once you reach 90 days seasoning (it may take that long to do the rehab), if he can go full doc then FHA will refinance him to a higher LTV.

Always happy to help, if you have further questions regarding his scenario, let me know.
 

offroadaz

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Feb 5, 2008
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Sorry for the naive question but why Is your friend borrowing the 100k from you rather then doing a traditional mortgage loan through a bank?

I'm very new to the game and am not sure I understand the reason/benefit of using a hard money lender as opposed to a traditional mortgage.

I do like the basic business model though. Buying foreclosed or distressed homes below market value then renting them out for a positive cash flow sounds like a good idea
 

Diane Kennedy

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Consider the cash out refi, if he can document enough income (full doc with good debt ratios), or can prove self employment (occupational license, CPA letter etc....). In other words, if he has NO employment, then scrap the refinance idea completely. Also, if he has to go stated, you will want him to be able to verify at least 2 years of some sort of self employment, or at the very minimum a j o b.

He will have some money in the bank for verified assets right?

You have checked his FICO scores to verify credit is over 720 right? Dont trust some online scores (we call them FAKO). www.myfico.com is the only website I have found that actually match what we lenders and brokers are pulling.

If his credit, employment status, and liquid reserves check out, you could get 75% LTV with no seasoning requirements.

That being said it would obviously take some time to rehab the home prior to you ordering your appraisal.

Once you reach 90 days seasoning (it may take that long to do the rehab), if he can go full doc then FHA will refinance him to a higher LTV.

Always happy to help, if you have further questions regarding his scenario, let me know.
Jim - Just to add on to your VERY good outline of how the process works. Some states have made the stated income, or no doc loan, illegal. Nevada for example is one of those states.

I'd meet with the mortgage broker you plan to take you out of the deal before you even begin. Ask them what the seasoning requirements are, what LTV to expect, and whether your friend will even qualify for the loan.

I still vote "pass" on this one. Doesn't matter if you're going to hold it as a rental. You can put lipstick on a pig, but it's still a pig.

In this market, you can do a whole lot better. Phoenix never really crashed and I have friends picking up turn-key REO's at 50-75% of FMV.
 
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JScott

JScott

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Sorry for the naive question but why Is your friend borrowing the 100k from you rather then doing a traditional mortgage loan through a bank?

I'm very new to the game and am not sure I understand the reason/benefit of using a hard money lender as opposed to a traditional mortgage.

I do like the basic business model though. Buying foreclosed or distressed homes below market value then renting them out for a positive cash flow sounds like a good idea
Good question...

I'm offering him a no-interest loan for a few months just to help him bootstrap his real estate venture (though he does have some money in the bank and good credit)...

This would save him having to pay the downpayment on the original loan, as well as having to come up with cash for the rehab (if he couldn't get that as part of the loan).

Just doing a good friend a favor...

That said, based on what everyone is saying, I need to verify that his numbers are realistically conservative or tell him to find something with more built-in value.
 

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EasyMoney_in_NC

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You just need to treat him as the bank would. Have him provide an appraisal showing the sales, cost, and income approach.........all done. If it works do it, if not walk. Don't make it personal, make it business. I almost did the same thing with a buddy of mine for quite a bit more. Didn't go thru (didn't like the #'s on either end)but he did make the deal work via a banker and we are still good friends (and now business partners on an unrelated venture).
 

andviv

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I just noticed tis thread so I am late to the party....
In this case the other question I ask is, would you be ready to foreclosure on your friend's property to get your money back????
Is your friendship worth the loss you could incur in this deal?
I know these are not the questions you asked, but I do believe it is important to put it out there.
 

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