Hello. BP,

We’re scraping the bottom of the barrel to get this project to the finish line but are coming up short and I’m worried about what will happen when I apply for a cash-out loan. Let me give the scenario and I’d love to get some feedback....

In Jan my wife and I were the winning bidders on a house in North Canton, OH at auction for $64,000. The ARV was estimated at around $165,000 leaving us a total budget of $115,500 according to the 70% rule. Leaving $51,500 for the rehab. We'd saved up $32,000 and were planning to use HML to fund the rest of the project.

We'd planned on titling over the property into a LLC after everything was said and done to make refinancing on a traditional mortgage easier not realizing most HMLs only want to lend to corporate entities. As closing was drawing near and no funding was available, we tapped into our other business's coffers to complete the purchase in cash. This meant we were also on the hook for the entire rehab project for the most part. We then completed the title over into a LLC in the hopes we could still curry favor with HML with no luck.

Then, over the course of the last 5 months, the scope of the project grew to twice what we had estimated as everything that could need replacing did. This is a stark example of the importance of getting a thorough inspection! Everything including much of the framework had to go! To date the total project is nearly as much as the original ARV. We're tapped out and looking for small business lines of credit or personal loans to get us to the finish, but lenders are hesitant because of our moderately high DTI.

I'm resourcefulenough to scratch together the rest of the project money. My question for the forum is; are we going to have trouble refinancing the property if we're having trouble getting $15,000 small business loans now? Our adjusted ARV is closer to $225,000, all pure equity, because of all the necessary updates that needed to be made and we already have renters waiting to sign a lease for $1435 (+$45 pet fee) which is $250 more than our original rent estimate.

We’re in FL but I’m tempted to fly to OH and hit up every small bank and credit union in the area in person to plead our case. What are your suggestions? Any help would be great!

Aaron 

Aaron, who gave you that adjusted ARV? Get the opinion from a few sources and don't just guess on it. My recommendation is to absolutely not touch any kind of merchant cash advance company, they are the devil. Don't keep digging the hole deeper, if you have equity now why not just sell? What's it worth right now and can you sell it to an FHA buyer? Why did the banks and HML not want to finance you?

How did the ARV go from 165k to 225k? Did the original ARV assume the condition was going to be poor at completion of construction?

I would look long and hard into the decision on whether to keep the property and have trouble refinancing or sell it.  You should be able to get a realtor's opinion on the price to help you with determining the current value. 

@Aaron Hale I think you should stop, and sell. You can't just up the ARV because you spent more money. It's pretty clear you're grasping at straws.

You didn’t get your financing lined up first. All HMlL only lend to LLCs which makes me think you’re incredibly novice in a lot of ways...

Thank you for your service, I’d put a stop work order on everything until you figure out if it’s worth it.

Your DTI can be a killer for you from most lenders. I am assuming you plan to hold as a rental? how did the arv change? How did you arrive at the old and new arv? I can give some local suggestions if needed. How did you find the renters? Have you qualified them?

I would be interested in seeing what’s going on with the property here in North Canton as I am local. I may be able to help or find someone who can. 

You bought wrong ..you estimated wrong ..and you didn’t really secure the financing . Geez that’s a bad situation .

I’d sell the thing and chalk it up as a lesson learned . The bank is not going to bail you out . The arv is not going to magically go up to help you because you went over budget .

You can sell for what it's worth and that's it.  Just because you went over budget it doesnt mean it's worth more money.  

Thanks for your input @Rob Mcclellan . I”m not sure what all this talk about selling is about. So the project went over budget. It earned us at least a Bachelors of science in what not to do your first time out. Regardless, we own a terrific property which is currently free and clear in a great location with renters standing by. 

Our , my wife and I, day job is a chocolate company. We financed a company vehicle and were going to pay it down with seasonal income. However, that went into the property, hence the higher DTI. A portion of the cash-out was to go to paying that off.

The original ARV was based mostly on an average of online sources; Zillow, Trulia, Redfin, etc. I know they can be very inaccurate but after a closer examination of the specific neighborhood, comps nearby, and the updates we've done including increasing square footage, we are confident it will appraise much higher. $225,000 may possibly be optimistic but the comps don't lie.

We fond the renters who have been qualified through a friend. The friend is a doctor at Akron General and one of the renters is a 1st year resident. They plan to stay at least 3yrs during his residency.

If you know any lenders in the area who may let me pull some of the equity out of this property, I’d appreciate the lead. 

@Aaron Hale if you borrow money to do real estate, even if it’s unsecured it’s still not really free and clear

Originally posted by @Dennis M. :

You bought wrong ..you estimated wrong ..and you didn’t really secure the financing . Geez that’s a bad situation .

I’d sell the thing and chalk it up as a lesson learned . The bank is not going to bail you out . The arv is not going to magically go up to help you because you went over budget .

I know I take contrarian views but this remote rehab that is touted in the books sold on this site is so Dangerous for so many people granted some with do fine.. those with experience but there should be a big forward in that book and that WARNS people that this is not to be done with those with no experience.  There are far more things that can go wrong than go right..  locals in a market when doing a big rehab are at the properties almost daily.. that's how its done.. controlling costs.. 

also FWIW local banks generally are not going to lend to an out of market borrower especially one with no experience and only one property why would they risk far to high.. this needs to go to a national lender for the refi..  refis  are pretty standard these days.

appraisal loan to a certain ARV.. bank sends out appraiser you hope for the best .. then its your DTI and fico.. if those all match up you get your refi.. or you just sell this property get your cash back if you broke even that's a HUGE win.. if you lose a little like mentioned above this is tuition fee …

@Aaron Hale

Aaron, I commend you for taking the first step, and I thank you for your service to this great country!

That said, I am an investor in the surrounding area as well. What are you estimating your CoC/ROI before refinancing, and after refinancing?

Your area can be costly. I'm assuming out of your $1480 in rent, probably $300-$400ish will go straight to taxes and insurance? You'll also want to save 25%+ of gross rents for things like repairs, maintenance, PM, and capex. On top of that, if it does appraise for $225K and you refi at a 70% LTV, you're going to have upwards of a $800-$900/mo. mortgage payment. Yes, you will get appreciation in that area, but by the quick numbers I'm running, that doesn't leave you any cash flow (if you refi 70%).

Also, for contrast, you can invest in 3 $50K properties outside of that area but just a few miles a way in the city, and realize $2,000-$3,000 per month in total rents. Yes, it's more tenants to deal with, but if a tenant vacates when you have 3 properties, it doesn't impact your finances as drastically.

Anyway, hope this helps!

@Dennis M.

I think Dennis is absolutely correct. I don't get how your ARV magically changed, but I think it's time to dump the property and recover what you can. Managing an out of state rehab is tough. Are you folks familiar with the market at all? If you don't want to dump it, then consider adding a partner in exchange for equity. I'm not sure that the banks would dive in to save you - the facts here demonstrate extraordinarily high risk, especially considering that you don't appear to know how to evaluate a market or evaluate a property (or at least that you didn't evaluate this project correctly).

Anyways, good luck

@Aaron Hale If you do a cash out refinance (conventional) and use it to pay off the debt incurred in buying and rehabbing the property, the monthly payments on that debt will not factor into your DTI, so that shouldn't really be a concern. The only concern might be a drop in your credit scores due to high utilization of credit lines.

The new monthly mortgage payment from your cash out refi will be netted against 75% of the rental income from your new lease.  As long as that covers the new payment, and you otherwise qualify with your regular self-employment income, I don't really see an issue. 

The house will need to be finished and in habitable condition when the appraisal is done. You will need to take it out of the LLC, but should be able to count the time it was owned by you in the LLC as part of the 6 months seasoning.

Again, I'm not really sure what the issue is (considering the other responses).  You said you can manage to finish the project.  You will be taking the debt that's unsecured right now and refinancing it with a mortgage on the property.  The rental income on the property can pay for the mortgage.  I haven't gone so far as to analyze all the numbers, but $115,000 loan amount will have a reasonable payment.

If you can't qualify conventionally, there are 30 year fixed rate lenders that qualify you based on the income of the property, and you can continue to hold title in an LLC. The most important thing you can do right now is finish the project and keep all payments current.

Hi Aaron,

I have been investing in North Canton my entire investing career and know the area very well. If the true ARV is a factor in your decision to sell or hold, I can help you determine the ARV within +/-5%.

I watch North Canton very closely (almost daily). My concern here is that based off the sale price you mentioned above, the only property in 44720 that has sold for the price you mentioned is on Massillion Road but this property has no where near an ARV of $225K, or even $165k for that matter.

Let me know if I can help.

Good Luck!

Tony

Originally posted by @Caleb Heimsoth :

@Aaron Hale I think you should stop, and sell. You can't just up the ARV because you spent more money. It's pretty clear you're grasping at straws.

You didn’t get your financing lined up first. All HMlL only lend to LLCs which makes me think you’re incredibly novice in a lot of ways...

Thank you for your service, I’d put a stop work order on everything until you figure out if it’s worth it.

 If you do decide to sell do not place that tenant in there. If you've truly got something that comps out for $225k or so the only way you get that price is by selling it to owner occupied buyers. Nobody is buying NEO rental property for that price with the rent your tenant is planning on paying.