Can I Use Hard money For Rehabbing Owner Financed Deals?

Question

I am trying to find different ways to close deals as a wholesaler and I was thinking of offering sellers a way for them to earn more money than the discounted cash offer we initially offer. I have a few sellers who are open to owner financing where they will carry a note until the property is rehabbed and sold. We would then split the profits 50/50. They are ok with being in 2nd lien position as we all know hard money lenders will have to be in 1st. My question is would the hard money lender have a problem with there being another lien on the property? Is there a better way to structure a deal where the Seller and my company can partner to get these deals done?

I believe it would be cheaper to just get rehab money from a hard money lender then getting money for purchase and rehab.

Any help would be greatly appreciated

I believe it would be cheaper to just get rehab money from a hard money lender then getting money for purchase and rehab.

Any help would be greatly appreciated

Amin Ali · Answer

@Andrew Michael Thanks for responding and you make some valid points. With owner financing, the property is deeded to me so I am the only one on title, therefore a seller really has no control over how we rehab and cannot walk in the middle of a project. They are protected by the note they carry which serves as a 2nd lien. Plus we would have some verbiage in the contract that says they will receive 50% of net profit.

You are right in saying they would have to have trust in us to complete the job successfully. But just like wholesaling many sellers will say no but its the few that will say yes that can really make this a profitable venture.

I am just trying to get through 3-5 projects so I can attract private lenders and show a track record. We have enough capital to get a traditional hard money loan but it would stretch us too thin and we spend lots of cash a month on marketing. We are trying to limit expenses but get deals done at the same time.

DAndre Pritchett · Answer

More questions to consider for your contract: what happens if the market drops and the ARV is less than expected. Will the seller be willing to refinance into a long term loan? What if the seller wants to buy you out of the deal?

Amin Ali · Answer

@Crystal Smith ...The resale profits. I am trying to find creative ways to get some properties Rehabbed and sold at retail. I am trying to build a track record to attract private lenders.

Amin Ali · Answer

@Jason Hirko Ok, I understand. I will contact my attorney and see what he can come up with. I am thinking of giving both scenarios to homeowners once they say they are interested in partnering up on deals like these. Thank you for your help

Jason Hirko · Answer

@Amin Ali That's the whole point of a JV agreement. The seller would have a bigger risk in that scenario, as it's their house that is getting torn up and they're on the hook for the loan.

Amin Ali · Answer

@Jason Hirko Interesting way to structure the deal. The only issue is how can we be protected if we are not on title? Couldn't the seller just walk away with all profits or is there something in the JV agreement that would not allow that?

Andrew Michael · Answer

So there are a few parts to this question.  I actually had the same thought as well and I think this a great example of thinking out side of the box to get more deals done.

Here are my thoughts.

From your point of view:  First you have to convince the home owner that you are capable of running the rehab smoothly and correctly.  What are you going to do if the home owner wants to bail half way through the process?  What if he wants to do the bare minimum in terms of work but you are going for an A+ rehab.  Who makes the call?  Is he a 50-50 partner in terms of decisions?  Its still his house, how much say do you really have at the end of the day?  Also, what prevents him from walking away after the rehab is complete, selling his newly renovated home, and taking all of the profits?  A properly written contract is going to be the key here.  Unless you are willing to lawyer up should the owner breach the contract, you are at risk of being cut out.  You have to be willing to enforce the contract in place AND the owner has to know that you will follow through and take legal action if necessary.

From the lender point of view:  Most lenders prefer there is no second position.  Some will allow it but many will not.  Also, just to clarify here; as a lender I am not giving you the rehabber a loan.  In this scenario, I am only loaning to the home owner.  This means that you will have to collect all necessary funds from the homeowner (borrower).  So again there needs to be a clear/defined working relationship.

Home owner point of view:   At this point, I am putting a lot of trust in you.  First of all I am trusting that you know what your doing.  That you're not going to come into my home and create a bigger mess or just walk should any major issues arise.  I also have to trust that you know how to run a job correctly.  I have to take a loan out in my name.  I have to go through that process, take that risk, and ultimately put a lot of trust in you.  If I am going to do all this, why not just hire a professional contractor?

The why:  This is the key.  You have to be able to show the homeowner why using you is his or hers best option and gain their trust.  You also have a huge obligation to make sure you deliver a product that everyone is happy with.

I know a wholesaler/rehabber who uses this type of structure often.  They have been successful with it and have fantastic results.  They also have had to take people to court several times for various reasons including those listed above.

I think this strategy is worth looking into and makes sense in some scenarios but I don't know if its the best business model long term.  Ideally you would only have to structure a few of these deals until you have enough working capital built up.

I am sure other people will chime in with their opinions and suggestions.  Perhaps there is a better more secure way to structure it but I can only speak on the ways I have seen it done thus far.

Jason Hirko · Answer

@Amin Ali Some may not have a problem with this, but do expect to pay a higher interest rate and points when there is  second lien on the property. What we've done in the past to account for the second lien is bump up the interest rate and points each by 1 point.

We've also done deals where the seller had no note on the house and could pledge it as collateral - so instead of doing a traditional sale, they entered into a JV agreement, and the loan was essentially in seller's name, the seller remained the owner until the flip was over, and once they sold, they split the profits. That way no one had to put any money down, and there really wasn't more risk to the seller than what you described - and they got the best rate.

I'm sure there are lenders in your area that would work out a deal like this if you build a relationship with them - and you HAVE to have sufficient cash reserves to make the lender more comfortable with you essentially having no skin in the game