Best way to obtain financing to fix a gutted home??

12 Replies

A few months ago I bought an abandoned multi family property at a tax auction conducted by the city marshal. There was a redemption period of a few months which allows the owner to pay off the owed taxes and keep their property.

The house is completely gutted (all thats there is the frame, siding, and a roof) and needs just about everything done. Im talking all new plumbing, electrical, drywall, flooring, windows...etc.

I purchased it for about 1/5 of the price that a completely finished comp would go for, and i bought it cash.

My question is now that the city's redemption period is up and i am its new owner, i would like to obtain financing to renovate the house. What would be the best way to go about this? The goal of this property, a three family, is to be kept as a rental property.

Should i look for a personal loan even though the interest rate will be steep? Ive heard of the 203k loan but one if its requirements is that the property must be owner occupied.

Any help or advice would be much appreciated.

Originally posted by @Will Diaz :

A few months ago I bought an abandoned multi family property at a tax auction conducted by the city marshal. There was a redemption period of a few months which allows the owner to pay off the owed taxes and keep their property.

The house is completely gutted (all thats there is the frame, siding, and a roof) and needs just about everything done. Im talking all new plumbing, electrical, drywall, flooring, windows...etc.

I purchased it for about 1/5 of the price that a completely finished comp would go for, and i bought it cash.

My question is now that the city's redemption period is up and i am its new owner, i would like to obtain financing to renovate the house. What would be the best way to go about this? The goal of this property, a three family, is to be kept as a rental property.

Should i look for a personal loan even though the interest rate will be steep? Ive heard of the 203k loan but one if its requirements is that the property must be owner occupied.

Any help or advice would be much appreciated.

Credit cards.

Loan from family/friends.

HELOC

@Will Diaz you can talk to local and regional banks or get a private lender. You could see if a contractor or other investors would do a JV with you.

I would not use hard money on a full gut as the interest cost will consume a lot of the profits.

The cheapest way is if you can get a private loan from a family/friend in your circle. The other way is to go to a local lender and ask for a construction loan and they will hold the property as collateral. I would say that that's the most reasonable option in terms of rates and access to funds. You can always go Hard Money on this but it will cost you higher rates but quicker return as it could take as little as 14 days to clear funds to you. 

A HML, if you decide to go in that direction, is not a sure thing. You would need to find a HML who will lend on ARV only, not on As-Is value.

Most, including us, lend on what the property is worth now and for some inexplicable reason, completely gutted houses don't have much As Is Value. ;)

This is the bread and butter of any hard money lender that funds flips, @Will Diaz . If your purchase price and repair estimates support a potential sales price (After Repair Value) that leaves you with a fair profit and keeps the lender safe, you shouldn’t have a problem finding hard money lender willing to help you.

Local real estate clubs are best here. A knowledgeable lender will know the area, understand the comps, review your repair estimate, and be able to confirm you have a good deal. After all, they are backing you with their money and that’s part of what you pay for, considering the high interest rate most charge.

I like your ready-fire-aim approach, but any lender will want to see a credible repair estimate and hopefully an understanding of your experience taking on a project like this. If none, and this is as good a deal as you suggest, you might consider partnering.  Always run the numbers to see if this makes sense.

One issue might be refinancing out of the hard money loan. What will you do if you can't qualify for that? The HML will want to see several exit strategies. One might be to buy and hold with a refinance but the other could be to simply sell the property when complete.

Go on Meetup.com and locate some local real estate clubs. Bring your deal with your repair estimates, anticipated rental income and expenses (i.e. a pro-forma), and a possible sales price backed up by comps. If this is really a viable deal, there should be many that will be interested in getting involved, including perhaps a partner. If none of this works, and it’s still a good deal, selling the property for a profit as-is is always an option.

Good luck, Will.

@Will Diaz if you can’t find financing, and it turns out to be a headache, consider selling it as a last option.

I have a client who bought a gutted home, then he determined it turned out to be more of a headache then he anticipated. So instead of his money sitting there, he sold the property to another client of mine, who is already working on the property.

Client 1 was happy to get his money back and a little more on top and has bought two other properties since then.

Just a thought if it doesn’t work out.

Originally posted by @Dan Gamache :

@Will Diaz how much did you purchase the property for? What is the $$ amount of rehab and approx after repair value?

I purchased it for 30k. The amount of rehab has varied among the few contractors I’ve had look at it. But it’s gonna be around 80-110k of needed work. 

The comp across the street sold for $170 recently although some people thInk that was a bit high. ARV could be around 150-180