What loan product should I chose for this deal?!

7 Replies

Hi all,

I am hoping to be purchasing a neighbor's house within the next 2-4 months or so. I should be able to get a very good price for the area because of the relationship with the seller. I hope to get the house for $300k. This property is a complete gut-job and will require ~$150k rehab for a total project cost of $450k. The ARV will be $550k at the minimum. I am hoping $600k but am using $550k as the conservative number for my analysis. The property is in NY.

I originally was just going to flip the property and dump the proceeds into more buy & hold where we currently invest in the Atlanta area. I don't currently own a primary up here so I changed my plan to flip and to make this my primary/starter home.

My goal is to stay as liquid as possible and use mostly outside funding for the project. I have a few options here and not sure which I should chose:

1- Purchase the property with conventional funding- 30 yr fixed. I can put as little as 3.5% down at the cost of a small $110/month PMI payment. The monthly payments would be low. Use private money for the rehab and then refinance into a new 30 yr fixed. I would pay off the private lender and pull most of my money out and have a higher mortgage payment but at the cost of minimal money down. I would also have two closings here.

2- Purchase and fund the rehab with hard money, then refi into a 30 yr fixed. Most of the lenders I am talking to are 12% with 2-3 points. Most of them also want at least 15% of total project cost so I would need to use more of my own money on the front end, but then pull it back out after the refi. There would still be two closings here as well so I think the total costs here would outweigh option 1.

3- I have just started looking into construction/rehab to permanent loans. One of the lenders I am talking to will lend up to 80% of the total project cost so I would again need to put up a lot of my own money here. It would be interest only during the rehab period, and then convert into a 30 yr fixed at a low interest rate. I like the idea of this loan but I  would need to leave most of my own money tied up in this deal until refinancing with someone else. This loan type seems like it would be a pain to go through with all the different requirements.

4- I don't believe seller financing will be a possibility at all.

I would love to hear any other creative financing ideas that I am sure you guys have! Thanks in advance for any advice here.

Eric

Hello Eric, is the neighbor open to owner financing. Instead of using Hard money to fund your purchase just use them for the rehab and refinance it and pay them off. The other option is if the owner will finance the 20 percent down for you todo construction loan.

@Eric Telese if you do not plan to occupy the property yourself then normal conforming loans are not an option. 3.5% if FHA and that is owner-occupied only. Needing that much work I would question if it would pass an appraisal as is.

Hi Eric,
You may know some of what I'm going to post here already so bear with me if you do.

Option one: You would need a true private lender (a local guy willing to take second position) to do this. Also note that with low down payment financing, the property would have to pass a fairly stringent FHA inspection first (meaning no health and safety issue showing up on the appraisal). A conventional lender (higher down payment) would be a little more flexible but still want the property to be pretty much occupyable as is. I mentioned this as you said the house is a gut job.

Your second example: That would work but remember that if you take cash off the table on the way into the long term money the loan will be considered a cash out by the new lender meaning, you'll take a rate hit and a LTV hit (a LTV hit might mess up the loan to value ratios and kill the loan too). If you just get enough to pay off the rehab loan, the conventional lender will likely be a bit more liberal on LTV and a lower rate. The rates you are being quoted are not too terrible. I can point you in the direction of getting 100% of the rehab financed, getting first draw at closing, and a payment free rehab loan if you are interested.

Example 3: Construction to Perm works but typically, lenders will make you jump thru a lot of hoops during underwriting. They may even require your engineering and architect drawings before closing on a project of that size. And yes, the long term money will cost more than otherwise necessary.

Since you personally know the seller, Would he be willing to QCD the property over to you (that you don't record), Setup a contract for deed dated 6-9 months in the future that you do record, take over the payments during the rehab project funded by the local guy in second position, and then buy the finished house from him with the 3% money and pay off both of the other mortgages?

Thank you all for your advice! The lenders I have been talking to are offering conventional loans at 3-5% down (not FHA), with PMI of course. I didn’t know this was a thing until I started shopping around mortgage companies/credit unions. But they all have conventional options with less than 20% down which I was very surprised about.

@Adekunle Ilori I don’t believe they will seller finance. Relatives of my elderly neighbors are taking care of emptying the house and selling it now that they are in nursing home.

@Nicholas Covington I do plan on occupying the home so I will be okay for owner occupied loans. The home is habitable and has plumbing/electric, etc, just needs major improvements in every aspect.

@Account Closed Awesome feedback! I may have a few true private lending options to be second to the conventional for my first option. I will definitely PM you for your referrals. 100% financing for the rehab would be great. So you are saying that if I do a cash-out refi, rates are going to be higher? That is what I gathered from the construction to perm that their are many hoops to jump through. Your last option is interesting and I will have to run seller financing by them but I really don’t think it will be an option. 

I could also do a 203k loan at 3.5% down and just have the one closing cost. This would be similar to the reno to permanent loan but lower down payment allowances. Again I’ve heard many hoops to jump through along the way.

My goal is to sell this property after living in it for 3 years or so. I want to recapture as much as the forced appreciation I can at that point.

Originally posted by @Eric Telese :

Hi all,

I am hoping to be purchasing a neighbor's house within the next 2-4 months or so. I should be able to get a very good price for the area because of the relationship with the seller. I hope to get the house for $300k. This property is a complete gut-job and will require ~$150k rehab for a total project cost of $450k. The ARV will be $550k at the minimum. I am hoping $600k but am using $550k as the conservative number for my analysis. The property is in NY.

I originally was just going to flip the property and dump the proceeds into more buy & hold where we currently invest in the Atlanta area. I don't currently own a primary up here so I changed my plan to flip and to make this my primary/starter home.

My goal is to stay as liquid as possible and use mostly outside funding for the project. I have a few options here and not sure which I should chose:

1- Purchase the property with conventional funding- 30 yr fixed. I can put as little as 3.5% down at the cost of a small $110/month PMI payment. The monthly payments would be low. Use private money for the rehab and then refinance into a new 30 yr fixed. I would pay off the private lender and pull most of my money out and have a higher mortgage payment but at the cost of minimal money down. I would also have two closings here.

2- Purchase and fund the rehab with hard money, then refi into a 30 yr fixed. Most of the lenders I am talking to are 12% with 2-3 points. Most of them also want at least 15% of total project cost so I would need to use more of my own money on the front end, but then pull it back out after the refi. There would still be two closings here as well so I think the total costs here would outweigh option 1.

3- I have just started looking into construction/rehab to permanent loans. One of the lenders I am talking to will lend up to 80% of the total project cost so I would again need to put up a lot of my own money here. It would be interest only during the rehab period, and then convert into a 30 yr fixed at a low interest rate. I like the idea of this loan but I  would need to leave most of my own money tied up in this deal until refinancing with someone else. This loan type seems like it would be a pain to go through with all the different requirements.

4- I don't believe seller financing will be a possibility at all.

I would love to hear any other creative financing ideas that I am sure you guys have! Thanks in advance for any advice here.

Eric

If you can do 5% down, Freddie Mac's renovation loan is a better bet than FHA.