Using hard money loan as a gap loan without rehabbing

[Sean Dezoysa]

I'm targeting a property with about 20k rehab but will sell as is to a homestead buyer. I want to use an HML to fund (most of) the acquisition. When I resell the house on terms a 1st will be created and sold cover a pay off the HML loan (after discounting) in 1-2 months. A small 2nd will stay with me. The end buyer will be responsible for the rehab.

Hard money is usually for rehabs. I know other investors do the strategy above but I need to clarify a few things:

1. Are most HMLs comfortable having their funds be used as gap funds during a resale period?
2. If the rehab responsibility will fall on the end buyer will HMLs accept this and not require rehab funds (from me) be escrowed and drawn against?

Thank you

[Nathan Grabau]

I think they key for a HML would be to make sure that their LTV ratio's are met. If you are adding value through a rehab, this normally gives you more room, that being said, you shouldn't have to do this. Legitimate concerns that I would have and a HML will have:

2nd sale appraisal, if you have not done any rehab to the property, it will be hard for an appraiser to justify you selling it for more money than you bought it for. Second, I would be very concerned about how hard it will be to sell the 1st position you created. Secondary financial markets are incredibly unstable right now, so I would guess that you take a discount on the paper that you are selling. Before doing this, I would talk to who you are going to sell the note to, see what their underwriting standards are, and make sure you aren't going to have to take a 85 cents on the dollar haircut in order to get the cash out of the first.