Buying with hard money. Then cash out refi for renovations.

10 Replies

Hello BP, first post here. I am new to house flipping and have been doing tons and tons of research and I have a house I am trying to close In on. The house I am looking at is a hoarder house of a deceased lady being sold by her son (Private deal). I have a decent chunk of money in savings, enough to put down on a HML but not enough to do conventional financing and fund my own renovations.

Purchase price is $260,000 (Seattle market and way under value). Hoarding clean up should be doable for 20k doing a lot of the work myself. But renovations/repairs could be anywhere from 60k-120k. Can’t really tell until I get the house cleaned out (hoarding is extensive).

My question for you guys is could I get a HML loan for the 260k purchase price and 20k cleanup. Then once the clean up is done and the actual "as-is" value is significantly higher. Could I do a cash-out refinance and use the funds to pay off the HML and use the rest for the renovations? ARV of the house could range 550k-600k.

I know there is a lot of nitty gritty rules when it comes to refi and HML and what not such as seasoning, LTV, etc. But I just want to know if this is a smart investing plan or if there are better ways or options to go about this. Once again I am new to house flipping and I may be misunderstanding some things, I am turning here for clarity and advice.
Thank you all in advance. All tips and advice are greatly appreciated. 

@Jarren Durbin

You should be able to get one hard money loan for the acquisition and remodel. If you can't tell what needs to be done to the home, assume the worst. If the house is worth $550K fixed up and the acquisition and worst case repairs total $400K you are looking at an ARV LTV of 72%. There are lenders that will loan up to 75%. Put your numbers together with a rehab budget and start talking with hard money folks. If you are going to flip you are going to need to move fast and you are planning to resell anyway so make it easy on yourself with one loan.

@Tamara Deering Thanks Tamara. Forgot to mention the reason I'm doing it like that is because I can't cover the carrying costs of the house for the year if I do a HML for all of the renovation costs. I can cover the costs for the first few months while I do the cleanup, but not the for the whole year with the high interest payments

You might want to consider partnering with someone for this project. You need a bit of a cushion. Or talk to your HML about doing several disbursements, and paying interest only on what you've taken.

Additionally, for the clean up, just get a huge (30-40 yard dumpster) and hire guys to throw EVERYTHING into it. Offer them a $500 bonus if they get it done in 5 days. Then, you'll have it cleared out quick. You'll probably need several dumpsters, so get ready to call the dumpster company to come every 1-2 days. It won't cost $20k to clean it out, just the hourly cost of the guys, plus dumpsters, plus the $?? bonus to each guy. That will reduce your carrying costs significantly. It shouldn't take several months to clean it up. 

@Jarren Durbin

This sounds like a big first flip. Did you ask about owner financing? Interest only payments on the principal until you can refinance or sell the property would increase your ability to carry. Sometimes sellers want their number and if that's the only way you can get it to them, they might be willing. I'd get a hard money loan for the rehab or partner with someone before you start. You don't want to be dependent on a refinance after you get rid of the trash to complete the project. If you can't get the money going in, it's a huge risk, even bigger if you are concerned with the carrying costs. If a swing between conventional and hard money interest rates makes this project out of reach, it might be out of reach already...

@Todd Rasmussen @David Sisson

Thanks for the advice. This is definitely a big flip, especially for a beginner investor. My backup plan (exit strategy) was that I could sell the house after the cleanup and make a bunch of money quickly if I couldn't get the financing for the renovations. But I don't to leave potential profits on the table. I understand the risk involved with HML and funding. I just want to make sure this is a decent strategy and I'm going about this the best way possible. Thanks guys

If you can buy for $260, clean it up for $10, what's your sell price? What's your carrying costs? I suspect in Seattle you could unload it quick for $350? Not a bad deal for 1-2 months. 

@Jarren Durbin

Sounds like you have your head in the game and early exit options are a good backup plan. Even gutting and doing the demo (cheap) portion might be a good idea. People have a tendency to get sucked in and drive past all the exit opportunities until they are out of gas. Keep the strategic mindset and you should be okay. Good luck!

Budget $7500 towards clean out and carrying costs. Start on a private sale immediately and try to get it cleaned out and sold for $350+ within a month of purchase. Don't spend your time doing clean out, hire some guys to clean it out, mainly so you can get it done faster. If you want to dedicate your time to clean out too, that's fine, but get it done. 

Hope I didn't come into this conversation too late!  I live 5-10 minutes from West Seattle, so pretty familiar with the area.  That price itself sounds like a steal in West Seattle.

The problem here is that it's hard to "cash-out" a property that isn't stabilized.  It's also hard to get a rehab loan when you don't have a clear scope of work (SOW).  Most lenders will want to get an appraisal/BPO based on your SOW before giving you a loan, unless it's one of the local, expensive lenders @ 12%, which might be the way to go here.  There are also a few lenders who are cheaper and would do an exterior-only appraisal at that low price point.

Selling it right after you clean it up to another investor isn't necessarily a bad idea; that's called "pre-hab" around here.  I have some more thoughts, but need more information.  Open to meeting in the area to chat about it, if the deal is still alive for you.