Rehab Loan/ How does this work?

Question

Hello everyone!

Im currently trying to figure out how a rehab loan works in todays market.
Im trying to short sale a property with an ARV of 160,000
Ive got rehab costs at 55,000
I would Payoff the current lender at 60,000
Im guessing i need about 15,000 in a Down payment (figuring 10%)
Im accounting for 5000-7000 in holding costs (4-6 months)
And i would walk away with 20,000

So im guessing i need a rehab loan for 140,000?

How exactly does this work??

thanks in advance

Ned Carey · Answer

In my area (Baltimore Md) there are small local banks that will do construction rehab loans at better rates than hard money lenders and sometimes a better LTV.

They will do as good as 80% of Purchase price - you have to have 20% of the purchase price. They want you to have "skin in the game" and then finance construction up to 80% of the arv for construction costs. 
Rates around 9%. So this is a much better deal than a hard money lender all around.

One thing not mentioned yet. The construction money is based on a draw schedule. Once you own the house you start construction with YOUR money. Then the lender will inspect and reimburse you for work done. You then take that money and do more work, another inspection and another draw check. This process goes on until the job is done.

You may already know that but for the benefit of others, that is typically how it is done. Many new investors don't understand that and don't budget for the initial construction money.

Brendan D. · Answer

IMO in this situation a hard money loan would work best.
your ARV is 160k. in today's market most hard money lenders will do 65% of that amount which would include money to purchase the property and they would put the repair money in escrow.

160k * .65 = 104k.
that leaves 44k for the repairs. Assuming your repair estimates are spot on, you would need at least 11k to get this done, more if you have to pay closing costs.

Jon Holdman · Answer

If you go to a bank or most mortgage brokers and say "I want a loan to buy a house", you'll get a conventional "purchase money" loan.  The value for the LTV (loan to value) will be the purchase price, not ARV.  These days, you'll have to put at least 10% down, maybe 20%.  So, for your deal, with a purchase price of $60K, you would be able to get a loan for $48K, maybe $54K.

If you find a hard money lender, they will use the ARV as the "value" for the LTV calculation.  Used to be 70% of ARV for the max LTV, though other folks here say 65%.  You can include the purchase price, rehab costs, closing costs, points, and sometimes even payments in the loan, as long as you're under the lenders maximum loan value.  In my experience the ARV is determined by an appraiser, not your estimate.

To estimate the total cash you need to buy, rehab, and sell a property, start with the buy and rehab costs.  Add in the closing costs (about 2% of the purchase price), loan origination fee, and your holding costs.  The holding costs will include anything you have to pay out while you hold the property.  Almost always that includes insurance and utilities.  Might include HOA dues.  Might include taxes, though those are often paid just once or twice a year.  So, you might avoid paying them or you might get stuck with an entire year.

Points and interest rate will depend on the lender.  I've seen everything from 2 points and 12% (which would only go to 90% of purchase plus 90% of rehab) to 4 points and 15% to 0 points and 18%.  Points will be based on the loan amount.  Interest will too.  Some lenders want monthly interest only payments, others will let you pay it off when the property is sold.

Once you figure up the total cash needed, subtract out the maximum loan amount.  The difference is the cash you'll need.

Interest only payments are typical on hard money loans.  The payment is simply the monthly interest rate (1%, 1.25% or 1.5% in the above examples) times the loan amount.

I usually just slap a deal specific spreadsheet together.  There are so many variables, I don't find it useful to try to create a uber-spreadsheet to handle all the variations.

George Ramsay · Answer

Let me pick at this a bit to try and make sure i understand

my purchase price or the ARV?
What is a typical LTV rehab loan??

If i get a loan for the Rehab and Payoff, how much would i need to bring to the table?
And what would the monthly payments be?

Is there a rehab tool/website/calculator where i can figure this out?

Thanks again

Jon Holdman · Answer

Rehab loan is kind of a generic term.  Let's consider a hard money loan based on the ARV.

ARV is 160K.
Max loan $112K based on 70% LTV.  Figure 4 points and 15% on that loan.
Purchase $60K
Rehab $55K
Total $115K

Assuming all these are correct, and a hold time of 6 months, you stand to net between 10-15% of ARV when you sell.  So, $16K-$24K

You're not going to get a hard money loan of $140K with an ARV of $160K.  Some of the costs won't come due until you sell.  Like all the sales closing costs, which will amount to about 8% of the ARV, or $12.8K.  You lender might also allow you to defer the interest until sales closing, too.  That would be 7.5% of the loan or $8.4.  So, $160K sales price less these two items and the $112K payoff nets $26.2K.  You would need an additional $10K or so of your own cash to cover the excess of the rehab over the loan amount ($3K), the points (about $4.5K), and your holding costs (taxes, insurance, utilities, etc.

George Ramsay · Answer

hmmm.....thanks jon

Thats a real different way of looking at it. I hadnt thought of using hard Money, and was trying a more convetional/bank Loan at 7%

it might just be easier doing a Hard Money loan though.....i know my Networking group gives each other better rates then whats typical

defiantly opens up some other options

Thanks a lot for your help

Jon Holdman · Answer

A conventional loan is almost certainly going to base the LTV on the purchase price.  You might look into a construction loan that would cover both the purchase and some of the rehab.  Likely that will give you a better rate than hard money, but require more of your on money into the deal.