Securing a loan for rehab expenses

3 Replies

We have a flip property that we close on this Friday.

ARV (by Subject To Repair Appraisal) = $440K

Purchase Price = $230K

Repair Estimate = $100K 

We have secured private money to take the property down @ 10% and no points, but this is the first time that we have used this investor and when we met him and his wife for lunch today, he asked if we would be supplying the cash for the repairs.  

For a variety of reasons (we are set to close in two days, we have not yet proven ourselves to this investor, etc.), I quickly responded that we could and he responded with that is what they would prefer, which I totally respect.

This is our 4th flip and we have not used any of our own money for purchase or repairs.  We have only used private money to finance 100% of our previous deals.

We do have the ability to fund the rehab, but philosophically it is not our preference to tie up that much cash, for what in this case will be a longer rehab.

We also have the ability to raise the $100K from either another source 100% or a few different sources participating with $50K a piece.

My question is this -- since we have previously raised all of the funds used on a project from a single source, we have been able to secure their investment with a first lien/ deed of trust.  In this case, the first lien will be held by the investor supplying the acquisition funds -- so what sort of security could I offer the investor(s) who would be willing to provide the $100K rehab funds?

I have some ideas, but I would rather hear from someone who has dealt with this successfully previously.   

Best Regards,

DW

If they are open to it, you could put a 2nd lien on the same property. If you are holding on to any of the prior properties, pulling equity out of those might be another way to come up with the cash. 

Thanks Chris!

I did consider offering a second, but I wasn't sure how that would be perceived by the lender(s).  We are about to pay off one our previous loans next Friday when we close on a flip.  We performed very well for them, but as I stated previously they have experience with us in the first lien position.

To make up for the increased risk, I had also considered adding points, increasing the interest or even cutting them in on a small percentage of the profits in addition to any interest.

I just want to do right by them as they have already told us they are in for more deals, but I was thinking that we couldn't be the first ones to ever be in this situation and was wondering if there was anything that was sort of the standard.

We can provide the cash ourselves, and maybe we should, but I have the cost of funds figured into the deal and we still come out incredibly well on margin, so the preference is just to pay for the use of someone else's money.

@Doug Woodward   As others have mentioned, ideally it should be secured by a second position lien, and it's a pretty straight forward process to have an attorney execute that.  Typically I pay a higher interest rate for the additional risk and pay for the attorney fees, but not extra points.