New to BP and RE, with an interesting situation!

11 Replies

Hey all!  Just a quick background of myself.  I'm 23 years old with bachelors degrees in Ag Business and Crop Production.  I'm getting married in July, and decided to get into real estate investing to build my portfolio and give my family a better life than the humble upbringings I had.  Anything else you want to know, just ask!

So the situation.  I decided not too terribly long ago that real estate was going to be my first step in creating an investment portfolio.  Sitting on my couch last week, a buddy of mine gave me a phone call, which was pretty typical, but what wasn't typical was him pointing out that a local property was for sale that we would visit often when we were in college.  I didn't think much of it being that I already knew it was for sale, until he told me the price.  Upon hearing his words, I jumped on the web to find the property, and sure enough, it was just as he said.

The property is on 10 acres just outside of a small town in western North Dakota, just 20 minutes north of my current residence.  On the property, there is a 3 bed 1 bath house with a newly remodeled kitchen.  But what makes the property really interesting is the extras.  There is also a bunk house, three large pole barns (roughly 12,000 sq. ft.) 90,000 bushels worth of grain storage, a grain dryer and a barn.  This barn has a completely remodeled upper level that has been used for barn dances for the last fifty years, which is why we visited the property frequently.  

My hope with the property would be to basically rent everything out and run the barn dances, but I wouldn't be opposed to living in the house if it makes financing easier or anything like that.  I'm planning on borrowing the money for the down payment, closing costs and initial repairs from extended family.  I've already run the numbers more times than I can count, and even under worst case scenario conditions, the property stands to net $25,000 per year before management expenses, which will be going to my future wife and I. 

My question is, what is the best route to go for financing?  I have a commercial lender telling me a commercial loan is the only way to go, but I myself should be close to qualifying for the mortgage based on my salary.  Is there a reason to go with a commercial mortgage?  Are there any legal requirements that I would have to have a commercial mortgage?  Any other options or insight would be greatly appreciated!

@Dustin Smith

Can you give some more info like what is the list price, does the place need repairs and do you have an actual idea of what the whole place is worth?   Its possible you might be able to do a private money loan to purchase the whole thing and then refi out into a perm. loan.

Let me know the info and I will tell you if I think it can be done. 

The list price on the property is $180,000. The property is currently a fully operating farm yard (not uncommon for the area, and the reason for all the outbuildings) and as far as I know it's been kept up fairly well. I've accounted for $10,000 worst case scenario in necessary repairs, plus the drain field will need to be replaced at some point in the near future, which I accounted to $15,000 worst case scenario. I wish I knew the actual number of what the whole place was worth, but in my inexperience, I would estimate the house to be worth around $60,000, the grain bins and dryer I would estimate to be around $100,000, the pole buildings are probably in the neighborhood of $20,000, the barn I would say $15,000, the other outbuildings probably another $10,000. So around $235,000 before the value of the land. But again, I'm by no means an appraiser. I've also conservatively figured the average year to produce an NOI of $70,000.

$205,000, my apologies. 

Lucky for you the USDA has great 'farm' related loans!

Great tip! Sent them an email, so I'll hear back from them tomorrow. I'll take any other options or words of wisdom also! Newbie here looking to take in as much as possible from people wiser and more experienced. 

Well I'm back to kind of where I started.  The banks are going to require huge down payments and specialty programs won't touch it.  The property isn't really any one thing, but a variety of things.  I think private money may be my route.  Anybody have any insight on private loans that may be helpful?

Dustin, if the property was owner-occupied, then would you qualify for a first-time home buyer's mortgage? As for the value of the property, you could check with the local tax assessor. They know approximately what it's worth, because they tax it based on the assessed value. Another idea, just Google the address. You will get a rough idea of what it's worth. Or ask a local Realtor to do a Comparative Market Analysis.

The problem I've run into is that because of the grain storage and outbuildings, most program loans won't consider it "residential." The house itself is such a small part of the value of the property that they don't even want to touch it. The tax assessor is a great idea! But even if the price is way below the value, I'm having a tough time finding viable financing options. 

Perhaps attempt to get a combination of residential financing and owner financing.

Total price is $180k & the house is only worth about $60k of that.

Buy the home from the seller for 60k using owner occupied residential financing too keep the down payment as small as possible & then see if you can get the seller to owner finance you the rest.

It have an even higher chance of working if you are able to come up with another $40-50k on top of what the bank lent to you on the home. Once you get into the 50%,60%,70% down payment range sellers are more open to providing some type of financing.

Interesting!  Thanks for the input!

So after doing a lot more research, I've come to the conclusion that specialty programs won't work with it because it's not solely a residence, and the banks don't like it because there is so much going on on the property.  I talked to the bank in the town it's located (tiny town) and they're currently working on seeing what they can do for financing.  Great!  However, it's still going to be looked at as commercial and therefore I'm gonna get stuck with a 30% or so down payment, which certainly is not in the cards for me.  I know lenders don't usually like to 100% of the money into the game, but being that the anticipated property value is 10% higher than the asking price and it is a cash profit generating property rather than strictly an equity building property, I'd like to think that I can make it work.  

So, I've been conjuring ideas to make it work, and I'd like any input I can get on efficacy and legality if you have any knowledge of what I'm thinking I'd like to try.   

Option 1: Skip the bank, and go private. Either, (1. Find someone willing to drop $180,000, or 2. Set up an LLC or business entity for family/friends to contribute to in smaller quantities. The business entity will own the lien, and each individual's percentage of total contribution will be the individual's stake in the lien holding entity.) In exchange for their investment, they will be offered 1st position lien and 10% APR amortized over 30 years paid in full by the end of year 10.

Option 2: Get the 70% from the bank and 30% from family/friends or other private investors. The bank obviously gets what it wants, 1st position lien and interest. The family/friends receive either a 2nd position lien or no security if the bank wouldn't allow it, and due to the riskier nature, would receive an interest rate of 15% APR amortized over 5 years.

Don't hold back.  Could it work?

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