Hard money loan flip to myself to get equity out

16 Replies

I want to build a home. I've spent the last year and a half building my credit up to 600 from 457. I want to be the general contractor and build my own house. My brother who has been a foreman building houses for 10+ years is going to work for me.

I've found a local company that offers a DIY service to help walk me through the entire process, from financing, hiring subs to permitting. They are also a home builder so they have many local relationships.

Now my problem is my down payment equity for a conventional build loan. I've found a bank sale lot that I can get for under market value. My idea is to have my wife buy it with a hard money loan, then turn it around and sell it to me with a hard money loan for 15k more bringing it to market value.

Then using that 15k as my equity / down payment. Thoughts, tips, advice?

I'm located in Baytown, Tx.

Hi Darcy, I have 2 thoughts. First,  do you have a hard money lender already lined up. I don't have any experience with hard money, but it seems with your collateral being just land that may be tough. Second, do you see a benefit to buying using hard money under your wife's name and selling it to you instead of a refi? I think your strategy is intriguing and wish you the best of luck.

Most HML's won't lend to owner occupied homes. The properties being lended on must be an investment property. It's harder for them to foreclose on an onwer occupied property, so they don't lend on them.

@Darcy Maiangowi , sorry, but I'm never impressed with (similar) fake "seller credit" mumbo jumbo which artificially inflates documented sale prices, leading to skewed statistics, open to abuse! 

Smacks of mortgage fraud. Not accusing you, but can you see your problem?...

In my opinion, you need to work on that credit score a while yet, getting it up north of 720 should be your goal, its not that hard, simply pay your bills on time and dont carry balances, if you owe too much, borrowing more wont help, i would hate to see you build a house and lose it shortly after.  besides if you wait a year or two more, maybe you can get a great deal on the looming downturn. 

Originally posted by @Timothy Steele :

Hi Darcy, I have 2 thoughts. First,  do you have a hard money lender already lined up. I don't have any experience with hard money, but it seems with your collateral being just land that may be tough. Second, do you see a benefit to buying using hard money under your wife's name and selling it to you instead of a refi? I think your strategy is intriguing and wish you the best of luck.

No I don't have a hml lined up. The point of my wife buying it then flipping it to me is to buy it off her at 15k more than she bought it for to get the equity out of the property to get it back to market value.

Originally posted by @Mike Hanneman :

Most HML's won't lend to owner occupied homes. The properties being lended on must be an investment property. It's harder for them to foreclose on an onwer occupied property, so they don't lend on them.

I don't plan on occupying the home. Sorry I wasn't very elaborate in my op.  I want to sell it once it's built.

My goal is to become a new home builder.

Originally posted by @Brent Coombs :

@Darcy Maiangowi, sorry, but I'm never impressed with (similar) fake "seller credit" mumbo jumbo which artificially inflates documented sale prices, leading to skewed statistics, open to abuse! 

Smacks of mortgage fraud. Not accusing you, but can you see your problem?...

No I don't understand what your saying. What I want to do is turn the equity from buying the land under market value to cash and owe a note closer to market value.

I should have explained the whole project, number wise.

I found a lot available to buy in the 30-35k range. It is worth probably close to 60k but the bank foreclosed and is selling it for what they have into it.

I want to spend another 90k building a house on it and it will be worth roughly 180k.

So I'm spending $30 000 for the land, $90 000 to build and can sell for $180 000 leaving a profit of $60 000 minus closing costs.

What I want to do is take the equity of the land, let's say I pay $35k and it's worth $55k. There is $20k worth of equity, I want to cash out that equity into cash to use as my down payment on a conventional build mortgage.

The reason why I want to use hml is so that I'm not screwing with my credit with more inquiries and short term loans during this flip process.

Originally posted by @Scott Schultz :

In my opinion, you need to work on that credit score a while yet, getting it up north of 720 should be your goal, its not that hard, simply pay your bills on time and dont carry balances, if you owe too much, borrowing more wont help, i would hate to see you build a house and lose it shortly after.  besides if you wait a year or two more, maybe you can get a great deal on the looming downturn. 

The only debt I have is $22000 on a car note. It is what has helped to build my credit. I also have a partially secured credit card, originally secured for $300 but they increased my credit limit to 600 after 6 months on time payments. 2-3 days before the statement date, I pay it down to 10-25% range. I also have a credit builder loan that I've got 6 months worth of payments at $50 / month. 

I don't want to buy a home so waiting for the downturn won't help me significantly.

Currently there is a $50-60 billion dollar expansion going on at multiple refineries in Baytown. http://www.houstonchronicle.com/business/real-esta.... Also there is a 1000 units of residents to be developed over the next 2 years. So I want to build now to be ahead of the development. http://www.houstonchronicle.com/business/real-estate/article/Mixed-use-development-finds-Baytown-a-market-6627894.php

I see your I treat, BUT, EVERY Investor wort their salt,would NOT  Recomend trying to time a market, just my opinion, good luck

Originally posted by @Scott Schultz :

I see your I treat, BUT, EVERY Investor wort their salt,would NOT  Recomend trying to time a market, just my opinion, good luck

I have a contingency plan if I can't sell it, I will move in it and live there. It would be a good starter house for my family. I currently rent and we want to build our own house but if I can make a $30-40k profit on building and selling this house, I can rent for another year and use that equity to build on a bigger acreage and skip a starter house.

If you can buy the lot in the open market for $35k, that's what it's worth, not $60k. No lender, including HML's are going to play in the "related parties" shell game of inflating the price. HML's also require down payments, on lots probably 50%, if they would lend on a lot at all. As mentioned, 600 is still a very weak fico for financing.

Originally posted by @Darcy Maiangowi :

The point of my wife buying it then flipping it to me is to buy it off her at 15k more than she bought it for to get the equity out of the property to get it back to market value.

 No credible lender will do this deal. We ask for a copy of your purchase contract as part of due diligence. When we see your wife's name as the seller, we'll ask about relationship status and for a copy of HER purchase contract. If you disclosed all this up front, we would only lend based on her purchase price. If we found it out during DD, we'd look at it as fraud and would terminate the loan. Just be straight with a lender and see what they can do for you.

Sell your $22k car! Wait, what? You'd only get $15k for it? See what happens when you spend your money on consumables? (But if I'm wrong about that - sell it anyway! There's your deposit)!...

Originally posted by @Brent Coombs :

Sell your $22k car! Wait, what? You'd only get $15k for it? See what happens when you spend your money on consumables? (But if I'm wrong about that - sell it anyway! There's your deposit)!...

The car note is what is helping my credit score the most. It's my oldest account.

I contacted the DIY home builder and talked to him about my situation and he said that I won't need to get cash equity. On a construction mortgage, once the build is complete, if the property is appraised with 20%+ equity, you don't need a down payment.

So all my questioning was for nothing. But thanks for the feedback.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here