Help Me Understand Hard Money Lender Estimate?

Question

Hello hive mind!

I'm writing my first offer (YAY!) I applied for a hard money loan and they got back to me estimating that the rehab would cost 45k more than I had estimated. We are planning on doing a fair amount of work ourselves because we're handy, so maybe that is where the price difference comes in?

Details:

Property: 2/2 to become at 3/2 with one wall added, 1400 sq ft, 1960s build, list price 115k

Mechanicals: new HVAC 2018, most of the plumbing has been updated to PVC/pex, new roof 2020.

ARV: 150k

Offer Price: 75k

Estimated Rehab: 25k

Contingency: foundation inspection because there are some squishy spots in the floor. If there is something wrong then I'll go back to the seller and negotiate that.

Total Project Cost: 100k (plus all the fees and whatnot)

Monthly Expenses Once Rented: $111 vacancy (estimate because it's my first deal), $139 repairs over time, $139 Cap Ex, $0 Management (self), $30 lawn care

Hard Money Rehab Estimate: 80k

Hard Money Estimated Project Cost: 155k

I'm estimating the 25k based on mostly materials because we would be doing our own labor for cosmetic stuff and basically all the mechanicals look good. We will hire the skilled labor when needed. What am I missing for them to get such a different estimate than I have?

Derek Dombeck · Answer

I can't guarantee this, but my assumption is they figured out what it would cost to hire out everything based on your scope of work. The reason likely is because you are new to the business and have no track record of being able to do the work yourself.

As a lender, we often have to protect people from themselves. If you fail to get the job done properly  and the lender has to foreclose,  they are not going to do the work themselves to finish the house. They may hire contractors or just sell the house as is and take a lower sale price.

Right now, the lender is also looking at the risk vs reward of a current 2 bedroom houses value compared to a potential 3 bedroom houses value. I say risk, because when a flipper/ landlord guts a property at the beginning of a rehab, they have temporarily devalued the place potentially to a lower value than the amount of money  borrowed against it. I've had it happen on 1 of our loans and it sucks as a lender.

That's what I believe is likely happening.

Good Luck with your 1st deal!

Kat Hussey · Answer

@Derek Dombeck

Thank you, that makes sense. So I'll probably need to find a grand slam of a deal in order to get financing where they won't charge higher because I'm new? As well as estimate rehab higher than I think it will be?

Claudio Salvatorelli · Answer

@Kat Hussey, Are you just working with one contractor? Check with two or more construction companies before taking the final decision. You would need to lower down repair costs so this can help you in the long run.