Need advice on deal and funds for the deal
Southington, CT · Member since 2017 · 32 posts · 7 votes
I think I found a great deal. I need opinions on a deal and also the funds to buy it. Its a duplex foreclosure - asking price is $79,000. Needs new heating and plumbing due to freezing. Brick exterior. Haven't actually seen the property yet - only pictures, but I figure maybe needs $50,000 worth of work. Estimated ARV is about $200,000. Maybe more because three single family homes next door being built are selling for $250,000. I am thinking of maybe a buy and hold or could be a flip? Rents go for about $1200 in the area. I have about 1/2 of the funds needed. Does this seem like a good deal and what type of loan should I look into?
@Nghi Le Ah, yes, sorry, I was not clear but let me explain, Just for clarification, that it still might be $0 out of pocket AT THE END of the transaction. So for others who might be reading this and trying to understand how all this works:
Hope this helps!
On the surface it sounds like a great deal, but drill down on those numbers and make sure of exactly what you are looking at for rehab and rental revenues as well as the ARV. If it were me I would get a hard money or fix n flip loan, typically at 12% interest only for 6-12 months plus closing costs. You should be able to get it for 10-20% down payment and they will cover the rehab .
Do the rehab and then either sell it or refinance it in to a Fannie Mae cash out refinance at 75% of the new appraised value. Get all your cash back out and maybe more, rinse and repeat. You effectively have a nicely cash flowing property without any out of pocket money into it and a fair amount of equity still left in the property at that point. That's a home run to most people I know.
@Carol Labbe this sounds like a very good deal but you didn't mention if you were targeting this property for a flip or a buy and hold. It sounds like the type of a property that a Hard Money Lender would be able to finance. In general, a HML would lend 70% on a duplex. So if it's worth $200,000, that covers your purchase price and renovation work. HML have higher costs than other loans but if you need $0 out of pocket that's the route I would take. The HML will ask what your exit strategy is so if you are flipping...then it's obvious...but if you are buying and holding they may require you to be preapproved to refinance out of their loan.
Let me know if you have any other questions. Thanks!
Hard money seems to be the way to go here. You have great liquidity, so it shouldn't be hard to get a loan. But you need to decide up front if you're going to hold it or flip it. If holding it, get pre-approved with a conventional loan officer first to see if you can qualify for that refinance.
Your post seems to suggest that HMLs do 100% financing, which is very rare (especially for newer investors), and even the ones that do compensate by charging a lot for it, so it usually doesn't make sense (especially for someone who seems to have plenty of liquidity). Most require at least 10% down payment, and it doesn't normally change whether it's a SFR or 2-4 units.
@Nghi Le Ah, yes, sorry, I was not clear but let me explain, Just for clarification, that it still might be $0 out of pocket AT THE END of the transaction. So for others who might be reading this and trying to understand how all this works:
Hope this helps!
Gotcha, so you're essentially talking about the BRRRR strategy. A good deal is $0 out of pocket, but a great deal (with great margins) can put additional money in your pocket at the (cash-out) refinance. The OP's deal has that potential!
Your method requires a HML that would fund the purchase at 100% and also put the down payment in escrow. I've never seen this setup before, especially because the LTV is already at least 100% up front. A $70k loan on a property worth $50k is a 140% LTV loan, even though the 40% is held in escrow. It's going to be really rare to find a HML that will do all of this. Most lenders structure it so that they're not underwater or maxed up with leverage up front. That's why a lender would do 80% or 90% of purchase price and 100% of rehab (and not the other way around). And they wouldn't disburse rehab up front either because then they've lent out more than the as-is value of the property, which is why rehab loans are given in reimbursement draws. Lenders try to make sure they're always protected, and LTVs are their best protection.
It's a smart strategy in theory, although I'm fairly certain it can't realistically be done with hard money (but always leave room for myself to be wrong). Have you implemented this strategy before?
Seems easier to just do a regular 10% down loan with hard money, and then do a cash-out refi in 6 months to pull your money out.
@Nghi Le yeah, there's always little intricacies and the more you do it the better you know about these types of things but I have seen investors use super small amounts to purchase homes. Sometimes they have come under budget on their renovation costs too. Whether you find a good deal or come under budget that escrow amount can be refinanced into the payoff of the hard money lender...as long as it was your deposit. They can't give you "cash back" but they can refund you your initial deposit if it fits with the refinance. If you have 6 or less mortgages you can refinance 85% of the properties ARV. Admittedly, most want to keep it at 80% but if that Hard Money Loan fits in that amount and they can give you a portion of your escrow back it's totally fine. Hope that helps.
@Kevin Romines Thank you for the information. I didn't know investors could get Fannie Mae loans.