Teardown/remodel planning and financing

8 Replies

I have the opportunity to purchase a house and lot from my grandfather for significantly less than the fair market value. The house is in a desirable neighborhood in Massachusetts but was built in the early 1900's and has been abandoned for about 5 years with leaks and significant water damage and likely to have mold. It has a cesspool so will not pass Title V. I have never purchase property before and only have my savings to work with at this time. I should be able to purchase the property for about $200k and I am thinking another 200k to build a house that should sell for 600k. There are a few challenges with this. The house has lead paint and asbestos which will increase the tear down cost. It could be possible to save a wall and call it a remodel. 

I am first trying to determine if this is a feasible investment for my current situation. 

What type of financing would be available?How much would I need to put down? Should I ask my grandfather for owner financing?(He owns it clear) I am new to the process and just trying to see if this is feasible or not. I don't want to pass up on a good opportunity.

Hi Mark, there are a number of things you could do:

- You could finance the purchase through a bank, with between 20 to 30% down, depending on many factors like your income and credit score. You could also take out a loan for renovations, but I would check what banks do that.

- You could ask your grandfather for owner financing and that is preferable because regardless of your financial situation you could get a loan for buying the house + cost of building a house/renovating. Also you could work out a payment plan with him so you don't break the bank on day 1. As you may know, when you buy a property through financing with a bank, you've got mortgage payments to pay starting month 1, even though you have not yet sold the house. Add to that real estate taxes. So there is a holding cost while you do flip to the property that are not negligible if your cash reserves are low.

I am sure other members will give you other options as well, but yes, it is feasible.

First, ask yourself how you intend to potentially benefit from any property that's on the other side of the country. 

Doubtful if any conventional lender will pony up and fund a property with the issues that you list. Would you, if you were a lender? At any rate, lender guideline would certainly prevent this loan from being marketable in the secondary market.

That leaves hard money as a commercial lending source. At higher cost of funds and short terms, you'd have to pedal fast to complete your renovation to either resell (retail) or make it rent-ready and (hopefully qualifying for conventional financing. 

If grandfather is willing to accept seller financing, you could conceivably negotiate any terms that were acceptable to the both of both. This could conceivably include a payment start date that is deferred until you have a paying tenant.

Would I be executed about the opportunity? Only if grandfather were on board to sell the property and lender me the proceeds under favorable terms to buy property in my local market.

@Mark R. Welcome.

Tough to do from across the Country. Most folks can't work with a contractor that they see every day!

I'd suggest Flipping it but I suspect Grandpa wants to stay in the deal (Seller finance) and do this rehab/teardown/subdivide with you.

@Mark R.  Feel free to include more details about the house and its location.  The more information you provide, the more people can help evaluate the deal.  However, it sounds like this would be a sizable rehab or possibly a new build so that's going to be difficult to manage as a first time investment.  With you being across the country, that's going to make it exponentially difficult.  I agree with Mike Hurney, I think you should wholesale it to a local rehabber.  

What town is it in? 

Hi Mark,

How did you come up with the 200K number for a new build?  Also, are you sure your purchase price is actually well below fair market value?  Providing the town name would also be helpful. 

feasible? Yes

Should you? No

There are too many factors going against you...

Long distance

Inexperience

New England building codes

Questionable rehab/rebuild costs

My recommendation: wholesale it to someone or partner with an experienced rehabbed in that area. Good luck!

I agree with most of the comments that this is a big and difficult first project.

Couple that with doing it from the other end of the country will make it vastly more difficult.

Do you at least still have family and friends locally that could check in on stuff for you periodically if you did the project.  If you don't at least have that it is probably not worth attempting to do it unless you want to fly out this way a LOT.

You can just try to wholesale it or you can work out something creative to capture some upside as well.  Like your grandfather carries the financing on the place with no payments while the local investor rehabs it then gets a higher price or some profit share on the sell.  Probably will be cheaper than a lot of financing options for the rehabber and no initial cash outlay so it can be attractive.  Then you just work something out with him about splitting those profits since you setup the arrangement.  Of course by getting things tied to the upside you run the risk of there not being any upside.

Shaun Reilly, Real Estate Agent in MA (#9517670)
1-800-774-0737

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