How to finance the rehabbing of a Buy and Hold Investment?
Hey BPers!
So I recently checked out a duplex (2 3bd/1ba units) that’s listed at $220k, but requires a great deal of work given its age. For instance, the seller has already agreed to credit the cost of rewiring the house back to the buyer, as it’s 70% knob-tube. After running several pro forma scenarios, I’m highly confident that this property will cash flow after rehab.
I’m going back with both my contractor and electrician (both of whom are family members offering some of their precious time) this weekend to inspect the home and prepare a fair market estimate/scope of work. From what I’ve seen so far, both kitchens and bathrooms will need rehabbing, new electrical, outside paint, etc – I’m estimating around $30K in rehab, but of course this is subject to change.
My Question:
Let’s assume that the house does in fact require $30K in rehab and the seller is willing to come down on the price significantly (because he knows there’s a ton of work required, he just doesn’t want to do it) – let’s say we agree on $190K. I’d be happy with this figure, but, I would be left with very little cash for the rehab after paying down payment/closing costs.
What are my options for being able to creatively structure the deal in order to come up with the needed rehab cash? As this is a motivated seller* (more on this below), I’m thinking I can perhaps take a conventional loan for $160K, and have the seller loan me $30K (a la partial seller financing) on a 4-5 year balloon note amortized over 30 years (in 2nd position). Is this even realistic? How can I make this attractive to the seller? I’m assuming he has a significant amount of equity in the home, but, what is the best way to verify this as I am working with his agent (dual agent)?
*This is a motivated seller who has not been able to move this property for nearly a year – he inherited the property from his mother, is currently having it managed by a 3rd party management company (which is doing a TERRIBLE job) and he just wants to get out of it. He’s currently renting the units for $1150 each, while market rents for such units is easily $1600-$1700 rehabbed.
Thanks to everyone in advance!