Understanding the finances behind rehabbing a home to buy and hold

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I have put in an offer on a house that we are planning to flip. I'm a little concerned about the finances behind this flip.  Can someone please tell me if I'm understanding the financing correctly.

We are going to go with a hard money lender that would finance the initial purchase of the home (obviously charging a steeper interest rate).  The house is comping for about $120,000 to $130,000 right now.  We are hoping to get it for around $45,000 and repairs we estimate to cost $50,000 which will give us a post rehab total for $95,000.  If we low ball the post rehab appraisel to be $115,000, will the lender give us 80% of the post rehab appraised value?  So that would mean they would give us about $92,000 for the mortgage? 

So just to recap what we would have to pay. We would pay the interest charged on the hard money lender and then the difference between the amount the lender would give us and the total cost of the home?

I'm not sure if that all makes sense, but if someone could please help me I would really appreciate it!  Thanks,

Matt

HMLs are usually small companies, so rates and terms vary considerably. That said, I doubt you'll get 80% of ARV (post rehab appraisal). 70% would be more typical. And many have maximum loan to purchase and loan to rehab cost values. So, if ARV is $115K, a lender who will go 70% of ARV would loan you $80,500. But if they said you have to put up at least 20% of the purchase and 20% of rehab, then purchase plus rehab of $95K would have a maximum loan of $76,000. The actual maximum is the lower of these two numbers. So, you could borrow $76K in this case. You would need to comp up with the remaining 20%, $19,000, from another source.

Many HMLs charge up front points. So if the HML is charging you four points up front, they would take that out of the $76K loan. That means you would actually get $72,960. You would have to pay interest on the full $76K and pay back the full $76K when you sell.

Most HMLs will hold the repair money in escrow and release it to you in "draws" as the work is completed. So you would need money for labor and materials, then the HML inspects the work, then you get reimbursed. Some will give you a portion of the rehab money up front, but you will not get that full $50K up front. And if you go over budget you need to find the extra money somewhere else.

This is a bad deal. Purchase plus rehab of $95K vs. an ARV of $115K puts you at 83% of ARV. With hard money financing your potential profit on this deal is about $2000. Before taxes. If ARV is $130K its a better deal. You're at 73%, so your profit potential is more like $13K. If is absolutely essential you have a really good idea of ARV. You can see that small difference between $115K and $130K makes a huge difference. It if turns out to be $110K you're going to lose money. The HML will order their own appraisal (at your expense) before making the loan.

The high rehab vs. purchase is a bad sign, too. $50K is a big rehab budget. That's getting into full gut territory for a $45K purchase / $115K ARV house. Lots of potential for overages when you do that much work.

On the back end you have RE commissions (typically 6%), closing costs (I use 2% as an initial guess) and you may have seller concessions. Agents in your area should be able to tell you if concessions will be needed or not. If so, those are typically 3%. So 8-11% off the top at the sale. You will also have insurance (builders risk or at least empty house, these are both expensive policies that cover very little), utilities, RE taxes, and other carrying costs that will depend on the situation. Such as lawn care, snow removal or HOA fees. You will have some up front costs, such as the appraisal, inspections, utility turn-on fees, lender charges, and closing costs on the purchase.