Properties lined up, now how much will funding cost?

Question

I have been looking in the Ft Worth area for quite a while and I have about 5 houses that are available for purchase. Some on and off the market. They are all 75% or better. The sell prices are between $60K - $150K. Repair costs are between $5k - $30K.

I have $20K in cash and have $10K available in credit for the repairs.

What cost should I expect to pay for HML in rate and points lately as I have seen the number jump around and change greatly from when I was in CA.

Any advise would be greatly appreciated. Thanks.

Michael Vargas · Answer

Nick/Alberto, I appreciate the info. I do budget 6 months just in case, but at the price I'm looking to buy, Its not a lot, but it sure can add up after while if things go south.

Troy, great info. I'm always looking for more options and I'll look into that option. In TX, foundation issues are always a concern, but inspectors out here specialize in that because they can get nailed if the miss that. Certainly, I'd love to find that 65% deal, but I have to be realistic unless I get real lucky.

Thanks again for all your input.

Mike Vargas

Troy Sheets · Answer

Have you checked into a construction loan? We're getting 80% LTV (based on appraisal) for the purchase and 100% of rehab costs through a small, local credit union. We are buying in cash then refi'ing into a construction loan, maybe that's the difference, not sure they'd loan that aggressively if we didn't already own it.

Point being, I wouldn't jump right to HML if you can help it. Those points and interest can eat you alive when you run into problems. Also, your $20k cash and $10k credit isn't much unless you're playing in the really inexpensive end of the pool, which, on a shoestring budget, is probably the best place for you to start. If you do use HM make sure you have a stellar deal as you're going to profit less than you plan on, I promise.

Can you find a partner with some cash and credit?

What do you mean "75% or better"? I hope you're not talking about the "70% rule"? If so, on those low end houses and using HM, you should be looking at the 65% rule! The lower end houses, say ARV at $150k or less, the 70% rule starts falling apart quickly and things get real tight. Let's say it's a $120k ARV house. The 70% rule allows for roughly 10% profit, or $12k in this case. Great, right!? What if you have a foundation issue pop up that you missed? I hear that's not all that uncommon in Texas. What if that foundation issue cost $8k? Your profit is now at $4k! You think you can't have any other issues pop up that'll cost you most or all of $4k?

My point isn't to deter you, it's to prepare you for the fact that you don't know what you don't know and the only way to learn sometimes is through getting bitten in the butt a few times. I want to see you take that hit and still come out ahead. Find a deal at 65% ARV including repairs and, as long as you budgeted well for repairs and added 10% to the repair budget for cushion, you'll come out fine.

Alberto Camacho · Answer

The HM lenders I've seen in the DFW area typically do 70% ARV in the 14% range, 2 to 3 points sometimes one point upfront and the rest on the refi.

The idea behind the 70% is to allow you to refi into conventional at 75% LTV. Recently I've seen 80% loan of purchase price and rehab at similar terms. There are draw fees associated with the rehab funds on both of these loans.

They also look for 6 months PITI reserves on primary and 2 months for every additional homes. You don't want to get stuck in HM on a buy and hold.

Contact me if you like to get more specific numbers. I'm happy to crunch this stuff with you. I'm not a lender so no pitch from me.

Nick Baldo · Answer

@Michael Vargas,

Our experience has been that the average HML costs ~12% + 2-3 basis points. This is an interest only loan based on 75% LTV. Also keep in mind that most lenders will require you to pay all associated costs. That is, you will pay for their attorney and additional closing costs. Depending on the lender, this could be 2-5% of the total loan.

We're in the Buffalo/ Rochester area...so things may differ in DFW. However, some of the quotes we have gotten have been from national crowdfunding sites like FundThatFlip. I expect their rates to be rather consistent throughout markets.

Let me know if you have any specific questions.