Finance a sheriff sale with hard money loan, then refinance
Hello - First time poster here. Eventually I'd like to get into real estate investing, but for now this is about financing my primary residence. I've done quite a bit of research on this deal, but there are gaps in my understanding.
My basic scenario is this: Get a hard money loan to buy a house at sheriff sale at auction and get clean title, get livable and move in as primary residence, then refinance 6 months later with another lender to pay off the hard money loan.
Here are the details: The home will go to sheriff sale in central Ohio in May. The sheriff's site lists the appraisal as $250,000 and in Ohio the opening bid starts at 2/3 of that....so $166,700. You have to bring 10% deposit of the appraised value on day of auction, with the balance due within 30 days. Researching the property via auditor and recorders websites, the only liens appear to be original mortgage for $205,000 done in 2004. Assuming they made payments for 10 years, or through 2014, they would have a principal balance around $170,000 (assuming 4%, 30 yr fixed)....not critical that this be precise, but needed to estimate what lender will bid up to on auction day.
So, the real question is about the refinancing.....because if I can't see a reasonable path to refinance, then there is no way I'm getting involved with a hard money lender. I'm also not considering refi with the HML for now, though I'm sure that will be pitched to me, so conventional or FHA products for now. Assume I will be in the house, that it's livable with all working systems (HVAC, roof, utilities, secure), and that I've fixed it up to where it would appraise for say $250,000.
1) Will traditional refi lenders payoff a hard money loan?
2) How soon will refi lenders use new appraisal for their LTV calculations? 6 months, 1 year?
3) Will they payoff more than the hard money loan, say $20,000 more if I can provide great documentation (before/after photos and receipts for contractors or material in cases where I self perform).
4) What if that refi (HML+$20K repairs) is still below 75-80% of new appraisal?
I have other questions about the hard money loan, but honestly those are simpler and probably just revolve around not getting totally ripped off with points, rate, and payoff timelines. Also, I would obviously pay cash to do a good title search, quite possibly buy title insurance. Sorry for the long post - thanks to anyone and everyone that can reply.
Traditional Lenders will refi any loan, if you hit their requirements. 12 months / 75% LTV is what you can realistically "rely" on for your refi, with cash out being feasible at that time as well. There are local banks that offer products under the 12 month seasoning rule and to 80% LTV but do not rely on it as an exit strategy. If you are shooting for less than 12 months seasoning keeping good documentation of repairs and cost is good so you can justify the increase in value to appraiser, odds are the list of repairs and cost of repairs will be something either the loan officer or appraiser will ask for. I think B2R Finance is offering 3 months seasoning w/ 75-80% LTV. Park National Bank in Cincinnati will do no seasoning at 75% LTV. Again plan for 12 months and if you get it done sooner kuddos to you. My first deal was a hard money loan and after the points, loan fees, draw fees, closing costs and high rate the real APR was sickening. I switched gears to private mortgage lenders (friends and family network) offered 10% and that has proven extremely beneficial...83 rental properties later. Good luck at the sheriff sale, confirm the outstanding water bill is included as a seller closing cost on the closing statement and buy an Owners Title Policy.
Hello and welcome @Andrew James.
Your biggest hurdle with your plan is actually going to be finding a hard money lender that will lend on an owner-occupied house. All the ones I know of will only lend on investment (non owner-occupied) properties. I'd see if you can even find one that will before worrying about the rest of it. Good luck.
A HARD money loan would basically be just like cash. Transactional lenders, just the same, will gladly allow you to do a rate and term or a cash out refinance the next day on a property that was purchased cash. The next day rate & term will allow you to finance the property up to 97%, the next day cashout will allow you to finance the property up to 70%. Delayed financing wont require a new appraisal, it will just use the lower figure between the sale price and the original appraised value and is called Delayed Financing. Aside from Delayed Financing which is private money, for the standard cashout guideline of 80% to be allowed (Fannie Mac/Freddie Mac), a new appraisal and a 6 month seasoning is required. How much money you can pull is essentially predicated upon how patient you can be. Most will take their allowed 70% immediately, sit on the property for 6 months, and then do the traditional cashout refi and pull the additional 10% with a conventional loan or 15% with an FHA loan.
As long as you recognize the allowed and limited practices to rate & term and cashout guidelines, you can address any uncertainty pertaining to it. If you must pay off debt in excess to the hard money loan, like say an additional $20,000 as mentioned, this would most certainly make it a cashout transaction since you're borrowing more than what's owed on the first trust deed. Referring to the above guidelines, as long as your new requested loan amount to borrow is 70% or less than the lower of the two values, you can do a cashout loan immediately.
When lending, the decision will be made based upon risk. Since the hard money loan is basically cash, the success of the transaction will be based on one important merit, equity position. The equity in the deal will absorb the risk. The premium to pay is the high interest rate + the 10% limitation in cash out capability. Its obviously a much easier loan to close since it doesn't need an appraisal, credit, nor income & tax documentation. The 6 month refi cashout will need all of that. The absorbed risk in that scenario will be spread-out over all those parameters instead of just on the equity position. The benefit then would be a far more competitive rate of course and a far more stable long term financing option.
Hello again - Original poster here. After some turbulent years and buying a home through more traditional financing, I am ready to restart the pursuit of some flips and eventually rentals. Since this is such a great site for beginners, and I personally am always left wondering by forum threads about what ever happened.....I thought I would come back and update anyone interested on the situation in my original post. Pay if forward sort of thing I suppose.
So first, I decided not to take the risk and hassle of the house I was pursuing. Too much risk, deadlines too tight, too much had to go perfectly right. The house ended up selling at Sheriff's sale for $210K back to the bank. Two months later - yes, 2 months at least per the auditors website - they sold it off to an investor for $200K. 8 months later and the house sold for $295K to owner occupied. So the bank took a loss in addition to all their carrying and processing expenses, but got rid of it quickly. I'm suspect of that timing for bank to list & sell, but that's on the auditors website so whatever. Then the investor (the part I'm interested in) saw a $95K spread between purchase and sale price. Assuming 8% closing costs on the $295K, that is $24K......so $71K cushion to fund the repairs, carrying costs, and profit. Let's say $1K/month carrying x 8 months.....$8K, call it $10K.....and they probably put about $25K into it. Poured a new concrete driveway and garage floor I know, and needed some refinishing inside but no MAJOR damage. My guess is the deal was in the $40K profit range once all acquisition, repair, carrying and sale closing costs were covered. Exact cash-on-cash ROI would be dependent on how much was upfront cash vs. financed, but these are the things I can know from public data.
For the veteran investors on this site: What are your thoughts of this update? Any flaws in my post-game recap of the deal? I ask because I'm dusting off my research and planning to pursue my first flip. Obviously, this was done shorthand and my first deal will be significantly more involved in terms of writing a solid plan. Just wondering if I'm missing something major, or if this deal sounds in a reasonable range....
Nothing? Too bad.
Great Follow Up and Great Questions.