Creative ways to use FHA financing on wholesale deal?

Question

Hi BP Friends!

I am searching high and low for a multifamily property on the north west side of Chicago that cash flows -- no easy task! A lot of what is on the MLS is overpriced from a cashflow perspective and when I find a rare gem there are numerous above asking price cash offers that overtake mine.

I have expanded my search to include wholesale opportunities and found something fabulous in Logan Square that requires a gut rehab. However, as I expected with wholesales, it says "Cash or private/ hard money only".

I was ideally trying to do an FHA 203k renovation. I am wondering if it is possible for me to finance the initial deal with hard money then immediately buy it from myself using FHA 203k. Does anyone have experience or ideas surrounding this?

The price is 310k and ARV is 580k. Another thought was to finance everything with hard money then when the renovation is complete I can appraise and refinance conventionally with 30% equity. However the interest payment (assuming 12% annual interest on hard money loan of 410k) alone would be $4100 per month during the construction months. This would be a lot to eat in addition to my living expenses because i only take home 5k after taxes monthly from my W2 job.

Let me know what you think! Any ideas or wisdom would be much appreciated.

Meera Lakhavani · Answer

An update for anyone interested:

I managed to convince the wholesalers to agree to my FHA financing. It was a lot of back and forth because they wanted to keep my earnest money if financing fell through etc. Ultimately after analyzing the deal with some fellow investors I realized it wasn't as great of an opportunity as I originally thought, so I backed out. Now I am under contract for a 4 flat in a great neighborhood! It is turn key and cash flows nicely. I am happy with my decision.

Thanks again to everyone for the advice and input!

Jon Holdman · Answer

With wholesale deals and conventional financing, including FHA, you're going to run into a couple of hurdles. If its an assignment lenders often use the contract price. You'll have to pay the assignment fee out of pocket. If its a double close, the lender will figure out the seller you're buying from doesn't actually own the property.

Because you're talking FHA you must be thinking of occupying the property. That's a problem for hard money. Most will not lend if you're going to occupy the property.

Jon Holdman · Answer

Lenders are going to make the loan based on the LTV guidelines and the property value. The value will be the lower of the purchase price and an appraisal. What you really mean you want to do is to have the wholesaler record a $20K (in your example) lien against the property now. And then change the contract price from $100K to $120K. If you leave the contract price at $100K, the lender will use that. The extra $20K lien will have to get paid off, but it will come out of the proceeds of the $100K sale price. All liens on the property get paid off out of the sale price. They do not get added to the sale price.

Adding a new, $20K lien at closing will not result in the lender paying off that lien. Its a new lien, not one that would be paid off at the time of the purchase.

In your example you cannot purchase the property with a $120K loan for the simple reason nobody will get you a $120K loan when purchasing a property for $100K.

Frankly you are barking up the wrong tree to be trying to buy from a wholesaler with any sort of conventional financing. Its not impossible, but its difficult in the best of circumstances. That's why wholesalers say cash or hard money.

Jon Holdman · Answer

Assuming this is an assignment, your purchase contract would be with the current owner. If its a double close, your purchase contract would be with the wholesaler, and the wholesaler would have a separate contract with the current owner.

Creating a note for the assignment fee would not get it paid by your lender. Rather it would be the equivalent of a second mortgage you owe to the wholesaler. That would avoid you having to pay it at closing, but you would still owe it. And the lender may or may not allow the additional lien.

You would make this more attractive to the wholesaler by having cash, private money or hard money. Sorry.

Ibn Abney · Answer

@Meera Lakhavani I would consider looking on the southside if going the FHA route. Lots of opportunity in bronzeville and Brighton park, east garfield. Much more inventory and trust me these areas are changing fast! cheaper as well.

I have no experience with 203K loans, so cant really say, but doubt you can do it from a wholesale standpoint. Try homepath.com. First time buyers get preference.

good

Meera Lakhavani · Answer

@Jon Holdman It sounds like the assignment contract might be permissible by my lender since I am purchasing directly from the current owner.

Why would a debt against the property not be paid by my lender during the sale? Let's say the current owner is willing to take 100k for the property but the wholesaler is charging me 120k. Why can't I purchase the property with a mortgage for 120k with a 20k note of debt on the property that needs to be paid to the wholesaler?

Thanks in advance for your help -- I am new to this process and really appreciate your responses!

Meera Lakhavani · Answer

@Jon Holdman That is a good idea about offering to pay the wholesaler fee in cash though... it may simplify the whole thing (although its not IDEAL for me in terms of tying up my capital). I will try to see what their fee is and if I can afford to pay it out of pocket :)

Meera Lakhavani · Answer

@Jon Holdman Thanks for your response! I ended up proposing this to the wholesaler:

They allow me to have a purchase contract directly with the current owner BUT I give them a courthouse recorded note or lien for their fee. I want to fashion it so that the fee is recorded as a note of debt owed to the wholesaler that will be paid through my lender and title company during closing.

Does this sound feasible to you? I saw during an interview that Jamel Gibbs had done this before, but I am not sure about the nuances surrounding the note/lien.

Do you have any ideas on how I could make this, or a similar arrangement more appealing to the wholesaler? I sent them my pre-approval letter (approved for 200k more than their asking price to prove strong financing) and told them that my lender is on board (provided it is a contract directly with the current owner).

Thanks in advance!

Ibn Abney · Answer

@Meera Lakhavani Bridgeport is definitely HOT!! Deals wise its possible, but limited.

The goal (in my mind) is to look for the next logan square or wicker park. this way you have a better chance at cash flowing and appreciation.

Compared to Inglewood or Austin, definitely much safer areas, but Chicago is still Chicago. McKinley Park is great as well, but I think bronzeville is a better area IMO.

Good Luck!

Meera Lakhavani · Answer

Thanks @Ibn Abney! I am planning to check out Bridgeport and McKinley Park but will look into the areas you mentioned as well! Would you consider them safe?

Creative ways to use FHA financing on wholesale deal?

Creative ways to use FHA financing on wholesale deal?

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