BiggerPockets

Ok so i'm ready to get my first rehab underway, I've done enough research and it's about time that I pull the trigger. The only thing that holds me back is "MONEY". I don't want to use my own and the only way to go about this is to use HM.

HM lenders usually loan %65 ARV. So, lets say if I purchase a property thats well below ARV - Repairs - (holding cost) "I know this would have to be a steal" will I be able to secure HM w/o any of my own money?

You at least have to have earnest money. Also a good idea to have an inspection for your own peace of mind.

Hard money is not forgiving on rehabs; you need to be spot on rehab costs and complete it on time.

If you have doubts about rehab costs then pull in a mentor or wholesale to one so you can get educated on estimating the rehab.

HM lenders require skin in the game so you can't "walk away" if things don't go the way you expect.

Most require points up front.

PG

Talk to at least 3 HML's to find out your market.

Skin in the game is based on the deal. The closer you are to ARV the more risk for the lender.

Find a good deal to lower the risk.

Hard money works a few ways. If you have a track record with a lender you can sometimes work out your own deal. If working with a new lender you will have to go by their structure. I structure hard money purchases to buy property myself. If your looking for money to purchase and repair a home for resale you can do a it a few different ways that I do:
1. Make sure to borrow enough to cover the purchase and repairs along with the private lenders origination fees, insurance and closing cost and some holding cost. For example: You find a house you can buy for $20k, rehab of $10k, closing cost, $1k, annual insurance $500, loan origination fee of $2,000. Now your all into the home for $33,500 and the home should have a market value of around $60k. You sell the home for $50k and everyone wins. A HML should not have an issue with a deal like this. Keep in mind all HML also charge a monthly interest only, typically 1% per month. Good luck, this is what I do.

Look at this from a HML's point of view. Let's say you find a house for $32k with an ARV of $50k (roughly 65%). If the HML lent you the $32k, how are they protected? They just funded 100% of the property's present value. If you walked away or dropped dead right after closing, how will they get their money back? Even if they could get another buyer to pay $32k for the place, after seller's costs, they'll be in the hole.

So they have to have some assurance you're going to get the place fixed up and raise it's value to $50k to adequately cover their loan. Do you have the money for the rehab? Do you have solid evidence documenting your experience in rehabbing homes? The ARV value is only relevant if the HML is confident you can renovate the property.

Now if you can get that property for something like $15k, an HML might play ball since the place is worth $32k as is.

The bigger hard money lenders have protocol to follow to protect their investors and the make the money off the points and give the interest to the investors pooling money with them.

Not an expert on this at all it is just what I see.

The individual hard money lenders have more leeway in making the call because it's all of their money and not on behalf of someone else.

The collateral mentioned is very important as well as what is the foreclosure rights and time lines for the state you are loaning hard money in??

You could have great collateral value but if it takes a long time to get the asset back it could deteriorate further in value and get damaged.Also the money wouldn't be bringing a return in default.

Sorry Curt, but I disagree. Once the home changes hands for $32K, its unlikely you'll turn around and sell it for $50K. You've now established a value that's going to be tough to argue with. Homes that are truly worth $60K rarely trade hands for $32K. I suppose that happens once in a while, but rarely. More likely is the home is worth $60K once fixed up and without that investment, the value is significantly less.

Points never did get fully addressed. Points come off the top.

Lets work a deal and see what you need to do a deal with no cash of your own. This is just about impossible.

ARV is $100K. HML will lend 65% at four points and 15%. HML was't monthly payments. You need to hold for six months to close a sale.

Loan is $65K.
Less four points ($2,600)
Loan proceeds $62,400
Various loan fees: $1,000
Property closing costs: $1,000
Up front costs (inspection, insurance, utility fees): $500
Six months interest: $4,875
Other holding costs (utilities, mostly): $600
Left to spend on purchase and rehab: $54,424

In other words, 55% of ARV.

That's a SCREAMING deal. That's VERY tough to find.

The bigger downside is that if anything goes wrong, e.g., you go over budget on the rehab or it takes longer to sell, then you're totally out of money and you lose the house. Actually, that doesn't matter to you because you have nothing invested. But the HML doesn't want this and won't let you get into this position.

So, even if you can buy and fix at 65% (or, whatever the HML will loan you), you need another 10% (minimally) or 15% (to avoid surprises) of your own cash to complete the deal.

A savvy HML will want your cash in up front. You may have to bring some of it to closing. You'll probably have to pay for labor and materials and then get reimbursed by the HML.

The problem (or left out info) as I see it with Curt's response is that if a lender must "take back" the property, they must do so with costs involved, i.e. foreclosure costs as well as the time lost. Then they have re-sell costs and closing costs and would likely have to sell at a large discount to get out quickly. With that all said, that so-called spread would vanish in a heartbeat and likely end up with a loss to the lender, especially when considering the time value of money (opportunity costs).

I think you will find it hard going to find a HML to provide 100% financing. Your better alternative is to find a money partner or a private lender (friend, family member, associate, doctor, dentist, attorney, anyone you may know who would have liquid funds) and borrow from them after providing to them a fully laid out plan with all the numbers and the worst case scenario played out. if you can not get your lenders pricniple and interest paid out in a worst case scenario, you have not contracted a good enough deal in my opinion.

Though I didn't start this topic, thanks for all the great replies. I'm in the latter category, I have good experience in rehab & rent, though not a lot & I've run out of money (except for my contingency fund). I want to keep moving forward, but was worried I would may have a hard time finding funding. This gives me hope.