Unable to Refi Property Due to Land Contract?

Question

Hey there --Here's the general situation. We are preparing to buy a property that is mid-reno. We are taking over after the demo stage and because the house is gutted and not "habitable" and no bank will finance it -- the seller has offered a short term land contract with a balloon at 60 days.The issue is, now all the typical banks we would use are telling us we cannot refi a land contract that is under 12 months. We are purchasing for 475k with 100k down. We are paying cash for the reno work (approx 100k) and the ARV is 625-650k. We ideally want to refi for 475k and get our 100k back and hold the property for renting. Any ideas?Can we buy initially as an individual and then re-buy as an LLC in 30 days if refinancing isn't an option (though not sure how we'll get our 100k this route)? Are their private lenders that will help us refi?

Jeff S. · Answer

As I look at this, @Beth D., you’re paying $475k for the property, plus $100k for the rehab, plus all the holding costs as you perform the rehab.  That is, you’re paying $575k plus holding costs and potential overages.  This is at least 90% of the $625k ARV you stated, or almost full price – for what appears to be a busted project.

The seller must be beside themselves.

If this were a flip, you would obviously be overpaying.  I assume rental properties are selling in the area for you to have established your $625k ARV.  Not to be facetious, but if the rental income only supports a $625k value, why not just pay the extra 10% and buy one of these properties to cut out the rehab risks and time to complete?

Plus, 60-day balloon financing is a non-starter in my view.  I don’t know you (and your profile is blank). Nor have I seen the property.  But we have loaned on many busted projects to some very skilled rehabbers.  There is virtually no chance you will be able to rehab a gutted property and refinance in 60 days.  Six months to a year would be a safer loan.

The good news is you’re putting down $100k on a $475k purchase, or about 20%, and presumably have enough for the rehab.  This could be enticing enough for a hard or private money lender.  A good way to find these is to obtain recommendations from the organizers of some local real estate clubs found through Meetup.  They will know the reliable lenders, with the best reputations, who attend their club.

Joe S. · Answer

100 K down for only 60 days on a land contract/contract for deed a gutted house??😰😰

I’m sure you’re ambitious, but that has all the makings for trouble.

Drew Sygit · Answer

@Beth D. The issue you are dealing with is referred to as "seasoning", specifically, ownership seasoning.

Rules depends on the lender you work with.

FNMA: probably the loan type whomever you're speaking with is targeting.FNMA will recognize purchase price + documented renovation costs for first 6-12 months and lend based on that. Check with another lender if your person can't do this.

DSCR: some will do renovation loans that will account for costs vs ARV.- Some also don't have any seasoning if you properly document costs + renovation expenses.

Your other option, which I HIGHLY recommend, is to renegotiate with the seller for a longer land contract. Minimum 7 months - you'll need at least 6 months of seasoning and then about a month to close afterwards.

Nicola Mislinski · Answer

Beth, if you’re not going to get the renovation done prior to the balloon then you’ll need a hard money/fix&flip loan to keep you afloat until project completion. Once the projects completed you have the two options: sell or refinance through conventional/DSCR and hold. I have lending options for both hard money and exit refinance. Hope that helps.

Derek Brickley · Answer

Hey Beth!

Yes the typical banks will follow the seasoning requirements Fannie/Freddie lay out so there's a couple ways around that.

Option 1 - you could do a rate/term refinance out of that at any point.  At least that way you can get out from the land contract.

Option 2 - if the property will cashflow you could do a DSCR loan.  Some (not all) DSCR options will allow for immediate cash out based on the ARV once the rehab is done.

I know others have mentioned it, but maybe consider adding an extension clause in the balloon in case the rehab goes long or you need additional time to secure financing.  Feel free to reach out though if you have questions! Was just in Grand Rapids for the Midwest REI over the summer

Chris Seveney · Answer

Thanks for look at this as a purchase thus require the down payment. If you did sell our finance and they transferred the deed then gave you 6 to 12 months to renovate it then you could do a DSCR loan.

Beth D. · Answer

Hey AJ - it is in Michigan!

AJ Exner · Answer

Sounds like Hard Money would be a decent option as long as they are okay with some seller financing.

I think I know a group that might be able to help, where is the property located?

Unable to Refi Property Due to Land Contract?

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