Rehab Loans ?

Question

I have a property that is free and clear, with no liens. The estimated rehab budget is approximately $40,000. The most recent appraisal values the property at $55,000. I am struggling to find financing for this property and need a rehab loan with reasonable terms. Any suggestions?

Erik Estrada · Answer

Hey David,

I think the main issues you will encounter is the minimum loan amount and minimum as is value. Typically most lenders will require a minimum loan amount of $100k and a minimum AS IS value of $100k for a fix and flip loan. Depending on the ARV, I think you are better of using your own cash or getting a partner involved to finish the rehab and then cash out refinance with a conventional or DSCR loan. It may be less expensive going this route than paying a high rate, high fee hard money lender that could possibly do it.

Doug Smith · Answer

It will be hard with a more institutional lender like us to get down below $100K on a loan amount. Our cost to do business vs the revenue a small loan generates would put us in the red. You're likely best to fund that wish someone local...perhaps someone you know...that is looking to put $40K-$50K to work. I would stick with individuals at those lower price points.

Mike Klarman · Answer

There's your issue.

Let's say the structure is worth 10k?  20k?  And it needs 40k in work and the ARV is 55k.

Project cost = 50k - 60k

ARV = 55k

There's no profit margin for a lender to feel comfortable even thinking about a loan.

The problem with these micro price points is that almost no lender wants to even be bothered with them.

I always tell people if you have 30k, then you can do a low price point deal in a market from Pittsburgh to Indy.  By low price point I mean 80k - 100k purchase.

Tanarat Bunchom · Answer

Since the property is free and clear, you might consider reaching out to local banks or credit unions, as they often have more flexibility for smaller loans. Hard money lenders could also be an option, especially for a short-term rehab loan, though the rates may be higher. Another route is partnering with a private lender who’s open to investing in the project. Make sure to have a solid plan for the rehab and your exit strategy to make the deal more appealing!

Ko Kashiwagi · Answer

Hi David,

What kind of terms have you seen so far? There are options out there but it definitely won't be as sweet as deals with higher loan amount that are purchases (bridge is more limiting than purchases).

Jaycee Greene · Answer

Hey @David O Smith. Have you talked with any CDFIs in your area? They often have loan products targeted at rehab loans on low value properties, particularly those that are in underserved communities of big cities like Detroit.

Robin Simon · Answer

As others have commented, this is a scenario where you will have most luck with a private individual lender or some other local financing - just too small for pretty much all the national platform hard money lenders

Carini Rochester · Answer

Are you certain the after repair value will justify this $40,000 budget? Look at a HELOC on your own home to fund the repairs, then refinance into a new mortgage (at which time you pay off the HELOC.)

Corby Goade · Answer

Reasobable terms are relative, but that's a pretty serious budget for a property valued at $55K. If it will qualify for conventional, you would be just below the 75% LTV threshold. A cash out refi would be the least expensive option.

The real question here is what's the ARV?

Rehab Loans ?

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