Financing Distressed Property in Historic Neighborhood

8 Replies

BP Community,

First let me apologize in advance if I'm posting in the wrong forum.  This is my first post so I thought I'd make it personally memorable by tying it to my current real estate challenge.  As my question likely reveals, I'm new at this so thank you in advance for your patience and advice.

I'm trying to acquire and restore a distressed property in a historic neighborhood of Atlanta, Georgia. Currently owned by an in-law and has about $100k mortgage on it. Two year old appraisal values at $400k as it sits. I have plans and estimate for restoration that require about $600k to get to a state where home could be occupied. Based on comps in neighborhood I estimate ARV of +$800k.

My challenge is finding a lender that will finance the project.  I thought I needed something like a jumbo loan to acquire the property for cost of the note and finance the construction effort.  Was talking with Fidelity in Atlanta but they pumped the brakes when Ameris acquisition occurred.  

No national lender seems to offer this and my credit union doesn't do anything like it either. This leads me to believe that I'm looking at this situation wrong and/or talking to the wrong people b/c while there's risk here comps in the neighborhood should support a healthy ARV (but I lack knowledge and experience to prove that assumption).

What am I missing?  I don't have the cash to take on the deal even if I liquidate everything but have the cash flow to support financing.  My concern with simply buying out my in-law is that b/c the property is distressed, I doubt I could get an insurance policy to cover it until such time as I can raise funds to rehab.

I appreciate your advice in this matter.

@Thomas Wood

Wow, that is a challenge. 600k for a rehab on a historic property? Is this a mansion or something because that seems like a lot.

You’d make more selling it as-is if your appraisal is correct. However, I’d get your property re-evaluated before putting it on the market. Save yourself the time and the headache. If no one wants to finance it, then that should be a sign to you.

Originally posted by @Nick Rutkowski :

@Thomas Wood

Wow, that is a challenge. 600k for a rehab on a historic property? Is this a mansion or something because that seems like a lot.

You’d make more selling it as-is if your appraisal is correct. However, I’d get your property re-evaluated before putting it on the market. Save yourself the time and the headache. If no one wants to finance it, then that should be a sign to you.

Nick, I agree with you. I'd rather it were sold and the equity reinvested.  However, I should further clarify this will be my primary residence that I will hold long term.  Obviously a non-performing asset but the property has a family connection so it's a "happy wife happy life" situation.  Stated clearly: my in-law will not sell.   My spouse will not support a sale.  It's fun dinner table talk :)

My fall back plan at the moment is to acquire the property for cost of the note, get whatever insurance I can on it, perform stabilizing maintenance, and stockpile cash until I can make it work.  But as I said, I'm new to this and trying to figure out a way to make this happen sooner.

@Thomas Wood

That's important to mention you want to live there too. I'd go with your plan of purchasing it for what they owe. Get a real estimate and a new evaluation for what it'll be worth fixed up before you buy the property. When you buy it, go to the bank with your estimate in hand and pull a HELOC out and fix up the place. Banks would loan you money to fix a house you own rather than finance a purchase and construction.

You can go hard money lending and they’ll lend you the money as well. But that has a lot of draw backs too.

Originally posted by @Nick Rutkowski :

@Thomas Wood

That's important to mention you want to live there too. I'd go with your plan of purchasing it for what they owe. Get a real estimate and a new evaluation for what it'll be worth fixed up before you buy the property. When you buy it, go to the bank with your estimate in hand and pull a HELOC out and fix up the place. Banks would loan you money to fix a house you own rather than finance a purchase and construction.

You can go hard money lending and they’ll lend you the money as well. But that has a lot of draw backs too.

Appreciate the advice!

@Thomas Wood   Can you share more about the location and the condition of the house?  $600k is a very large rehab budget .... and if you rehab twice as well as I did when I first started, then $200k of that will be squandered.  

If the family gave it to you and you put $600k into it, would you/your wife be happy with the mortgage payment on $600k and $1k+/month in taxes?  Would you have extra funds to invest aggressively in profit making ventures?  

If you really want to do it, then go practice on old houses which need a $100k rehab.  After a dozen or so, you'll have enough experience to know what you don't know.  Maybe the family will see you as a critical partner in saving the family house and you can be the GC/Manager for a reasonable profit rather than a $200k loss.

Good luck!

Perhaps consider assuming the note and renovating slowly through a HELOC. If you have other investments, you can use that toward renovations also. Depends on what your goals are outside of this house (flipping? Rentals?) and the time frame in which you want to do this. Doesn't sound like you're in a rush since the family doesn't want to sell it, so you wouldn't necessarily want to take on that huge loan anyway.

I should add that if you purchase for $100k and then put $600k into it for an ARV of $800k, that's not a great return. I don't know what the state of the market is in ATL right now but in a lot of places, prices are hitting a peak so even though you project ARV at $800k right now, you might not see that by the time you're done. But again, if you don't want to sell, and you'll just hold it for the long term, or maybe will it to your own child(ren), you don't totally have to concern yourself with that.

@Thomas Wood   It may be easier to try to work within the lending guidelines and programs that exist to accomplish what you're trying to achieve.  I don't know the size of the house or the extent of the renovations needed, but if you can minimize what needs to be done to make it habitable, and keep the loan amount to conforming limits for your area, you could use a Homestyle Renovation loan to purchase and rehab the property.  Maybe there are some "luxury" projects that can be delayed until you're living in the home to cut down on the budget.  Once you're living there, slowly finish whatever other projects are remaining.  Maybe there is some historic restoration work that isn't 100% necessary for your lender, but that costs a lot and can be done later?  

The limit on eligible renovation funds has been increased to 75% of the lesser of the purchase price plus renovation costs, or the “as completed” appraised value for purchase transactions; and 75% of the “as completed” appraised value for refinance transactions.

@Rick Baggenstoss , @Andrea Townsley , @Stephanie Irto,

Thanks to you all for your advice and suggestions!  I grew up in residential construction in Florida so I know enough to know a) I don't have the skill to execute and b) the time to devote to GC'ing that work vs day job and other RE investing. 

It's absolutely a vanity project that would be my primary residence and likely willed to my kids (their grandparents purchased for a song in early 70s when the neighborhood was legitimately a war zone).  Friends live there, schools are where we're targeting for kids.  Strictly as an investment, I'll be the first one to state this isn't going to be a performing asset.  However, 30312 is pretty high performing.

I'm going to review the mortgage for assumability options, but worst case if I end up purchasing through my investment company and financing it, I can hold with tax advantages while building cash and team to take on the project in the future.

Big thanks for all your responses!