Big opportunity, currently low on cash reserves
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Specialist · NJ · Member since 2022 · 1k+ posts · 663 votes
1ySo, let's take 75% of your ARV of 550k = 412,500. That's about where you wanna be max project cost wise, really 400k or less to be under the 75%. You are about 405k - 425k. You are teetering on a possible thin margin.
Even if you only had to put down 10% that's 27,500 plus another 5 - 6k in closing costs. You may need 35k just to close. Now you need to get the construction rolling, only the 130k rehab is in escrow and your contractor, if he is worth a grain of salt, will want at least a 20k - 25k deposit on a job of that size, maybe more. You have to front the deposit, which the contractor uses to get stuff done and that allows the drawing process to start from the escrow of rehab funds. Then you have holding costs on a loan size of about 400k. Even at unpaid balance interest only payments the starting payments will be 2k - 2500 per month. I'd recommend an investor be liquid 75k - 100k to make sure they can get this done and have a cushion, cause as we know you always need a cushion.
10 Replies
- 1yJaron WallingPro MemberRental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
@Rick Zink You should lay out the numbers for this amazing deal. You'll get advice on which financing strategy makes the most sense. I could be wrong but I've always viewed HM as a "bridge" to get a rehab to the finish line. I'd not rely on one to fund the entire deal.
Getting over leveraged in this market is a bad idea.
Quote from @Rick Zink:
I'm in a position I've never been in before. Just closed on a couple of properties a week or so ago. They were rehab properties so I purchased under a construction loan. Took my reserves for down payments to a level that won't allow for another purchase at this time.
Given this, as luck would have it, an amazing opportunity that only comes once in a great while came to me. I've never used hard money for anything before so I'm not sure that's an avenue for me.
Im hoping someone can maybe explain the ins and outs of this type of financing. Risks/rewards, benefits/pitfalls of hard money to me...what are they? I understand the overall concept of it but since this has never been an avenue I have used it's unfamiliar and foreign to me.
@Rick Zink "hard money/Private money" typically takes cash as well. So, as said above, it would be helpful to lay out the details. It impossible to lay out pro's and con's of something without the details.
Hurst Real Estate, INC4.986 ReviewsI'm happy to provide details but I guess I'm not understanding why they matter. I'm looking for an overview of how hard money lenders work. It's not that I have zero cash, just not enough on hand to close the deal on my own.
Purchase Price: $275k
Rehab Cost EST: $130-$150k
ARV: $550k-575k
Lake Front house w/dock (a huge incentive on this lake)
I have a little over $30k available but don't want to drop much lower but also hate to miss out on this opportunity. I've got a little time to figure something out but not much.
- 1yRyan BlakePro MemberLender · TX · Member since 2018 · 936 posts · 713 votes
@Rick Zink I have a couple resources to share.
Every HML will work somewhat different but here is the standard flow:
1) Get pre-approved with an HML - This should be free. DO NOT PAY AN APPLICATION FEE. This is a sign of a possible scam.
2) Look for a property and get it under contract.
3) Request a quote or term sheet from your lender. Try to do this BEFORE you put any earnest money down. Make sure their fees work with what you are looking for and that the address is conforming to their underwriting needs.
3) Send the executed contract to your HML. They will let you know what other paperwork may be needed and probably order an appraisal. I am always skeptical of the HMLs that don't require an appraisal. An appraisal is the only thing you should ever pay for before you close the loan. It will help ensure you have a good deal and that your deal makes sense. No lender will lend on a deal that doesn't make sense.
4) After the appraisal comes back you will get a document that outlines the amount to be borrowed and all fees that will be relating to the loan (I would suggest to ask for an example of this document when you are searching for an HML so you will know what fees are going to show up).
5) Close the loan at a title company of your choice.
6) Begin work and make draws on any repair balance. Most HMLs will pay for work completed. To have the funds released you need to have a third-party inspect the house and the repairs made or provide pictures and receipts. Then they will release the funds based on what is finished.
7) Sell the home and payoff the loan / rent the home out and refinance the borrowed amount.
Hope this helps give a simple time-line. If you are looking to do a refi at the end of the hard money loan, I would suggest lining up that refi company at the same time you are looking for hard money. Your HML may have a company they work with frequently that will make it a smooth transition so ask.
- 1yRyan BlakePro MemberLender · TX · Member since 2018 · 936 posts · 713 votes
@Rick Zink I also wanted to share with you some key questions to ask a lender when you are looking.
Are you a direct lender?
This will be a gateway question. If the answer is no, that means they are a broker of some type. Typically this means they will take longer to close, may not have all the information for the companies they work with, and most hard money brokers get their money by taking an existing product and adding extra points to pay their fee.
What is your investor success rate?
Another way to ask this is what is your default rate. This is important to know. Many don’t track this statistic as closely as they should which is why many lenders go under. I think it is probably the most important stat. You want to make sure they are at or below 5% to make sure they are able to stay solvent. You don’t want your lender to go out of business while still holding your construction escrow funds.
Can you provide me with the contact info of some recent borrowers?
Any good HML will be happy to share the contact info of borrowers so you can see how easy the process was and how well they treated the investor.
Can you share a recent closing document or HUD?
This will show you more evidence of the fees they really charge. Not all lenders will share this as they will need to get approval from the borrower before providing. If not, at least make sure that you get a term sheet. This should put in writing what the fees will be.
What is your maximum LTC and LTV?
LTC is sometimes referred to initial funding. This is the percentage of costs (purchase and rehab) covered by the loan. A general range tends to be 85% to 100% covered. LTV is normally expressed as a percentage and that percentage is of the ARV. A general range tends to be 65% to 75% of value. Lenders will lend the lower of the amount between LTC and LTV.
Do you require an appraisal and survey?
Most HMLs will require these. I am wary of the ones that don’t require an appraisal. Lenders that don’t require an appraisal will perform a desktop appraisal but will typically have a very conservative view on the value of the property to protect the company’s investment. This means you will be coming out of pocket more. Survey is a toss-up on whether or not it will be required. Know that every long term lender will require a survey and if something comes up on it when you are trying to sell or refi, you could get stuck in hard money without an easy or quick way to get out.
Is there a pre-payment penalty?
Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs.
What is your draw fee & benchmarks for the repairs portion of the borrowed money?
Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project or that work is completed. They will also charge you to have an inspection by a 3rd party or to use an app to make sure the work is done. I have seen this range from as low as $100 up to $300.
Do I need to pay anything before sitting at the closing table?
There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.
And of course, what are the points, interest, and attorney/document/admin fees for the loan?
This will vary based on region but in general 2 – 5 points, 9% - 16% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $600 – $1,900. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.
If you have any other questions, post them in the same thread below so that we can all learn from the answers.
- Specialist · NJ · Member since 2022 · 1k+ posts · 663 votes1y
So, let's take 75% of your ARV of 550k = 412,500. That's about where you wanna be max project cost wise, really 400k or less to be under the 75%. You are about 405k - 425k. You are teetering on a possible thin margin.
Even if you only had to put down 10% that's 27,500 plus another 5 - 6k in closing costs. You may need 35k just to close. Now you need to get the construction rolling, only the 130k rehab is in escrow and your contractor, if he is worth a grain of salt, will want at least a 20k - 25k deposit on a job of that size, maybe more. You have to front the deposit, which the contractor uses to get stuff done and that allows the drawing process to start from the escrow of rehab funds. Then you have holding costs on a loan size of about 400k. Even at unpaid balance interest only payments the starting payments will be 2k - 2500 per month. I'd recommend an investor be liquid 75k - 100k to make sure they can get this done and have a cushion, cause as we know you always need a cushion.
- 1yRyan BlakePro MemberLender · TX · Member since 2018 · 936 posts · 713 votes
@Mike Klarman Great advice on that. I would say for a lake front you may even want to keep it close to 70% because of possible holding time.
- Specialist · NJ · Member since 2022 · 1k+ posts · 663 votes1y
I am good at finding the sub 70% project cost stuff. That's really where you wanna be. You wanna be at a 65% - 69% average project cost to ARV ratio, but it is REALLY hard to find.
- 1yRyan BlakePro MemberLender · TX · Member since 2018 · 936 posts · 713 votes
@Mike Klarman Really? That might be regional. I have written 29 loans this year and the average Cost vs Appraised ARV is 69.6%. There is a high concentration of those in Texas (about 2/3) but it is relatively similar in most of the markets we lend. We lend up to 75% of the ARV but most people are buying and rehabbing well below that from the investors I have been working with.
@Rick Zink since you've already closed on those properties, HML is a bit late.
If this opportunity is really something you want, maybe you can JV with someone who has the funds needed. You can work out a repayment of 50% (or whatever split you negotiate) of the money put in after you flip a property or 2. Just make sure this is someone you want to partner with - same values, ambition, goals, etc.
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