BRRRR a Duplex - Financing Via Hard Money & VA Loan

9 Replies

Backstory:

I'm in the military and have access to the VA loan with allows 0% down on a SFH up to $400k, a duplex up to $600k, and a quad up to $800k. The catch is the property must be move in ready and the VA sends inspectors to the property to ensure that it is. I have not found a clause that allows me to buy a property that is not move in ready and fix it up myself.

The Problem:

Houses in my area are extremely overpriced. There was a rise in the market during an oil boom, a massive flood, and people bought homes due to the lack of available rentals. The market has corrected itself, but the property owners have held tight to the prices so they don't lose money on their homes when selling. Therefore, in order to buy, I'm either going to over pay for a move in ready home, or purchase a fixer-upper. 

The Proposed Financial Solution Oversimplified:

I purchase a fixer-upper 'duplex' with a hard money loan (I'll do my homework and work the points, interest, and rehab into the loan), rehab the 'duplex' to my liking, move into one of the units (house hack) and rent the other unit, then use my VA loan to "refinance" the property with 0% down and low monthly payments (probably around 5% with my credit score hovering around the 800 mark).

Without getting into the VA loan weeds, is my proposed solution even legal? Does anyone know of anyone who has done this sort of financing for a home/multi-family?

All advice is greately appreciated.

Respectfully,

Chase

@Chase Stocki , thank you for your service sir. I have done multiple buy with hard money, rehab and refi, non ever with VA, but don't see why VA would be different. Couple of things to keep in mind - usually you need 12 months to be able to use appraisal to determine the market value. Inside of 12 months they will use purchase price - you will be out the cost of rehab. Here it is hard to get anything passed by VA inspectors, so remodel needs to be top notch. Good luck.

We have used the VA twice out of 30 odd deals. Neither house was in perfect condition. The first had 5 years left in the roof, as assessed by the VA appraiser, but barely.

The second house has a lot of renovation done. We started off with owner financing for six months, and then a hard money loan for six months. So this was a refinance into a VA. There were some items that we didn't get finished, such as strapping around new hurricane grade impact windows, some walls that had Sheetrock up but weren't plastered yet. The underwriter agreed to waive a number of the lesser items, ones that they initially insisted must be done. At the end of the loan process, the lender "held back" funds for a contractor to finish siding and deck installation. The loan closed.

There is a VA property condition report, so you can search for this. They are looking at specific things, particularly safety issues.

I’d be more concerned whether that area is growing, whether there are others you can sell to later, or rent the property out to, when you get orders and leave again.  It will bite hard if you are stuck with a renovated property that you can’t unload.  

@Joey Hernandez I see this post is from a few months ago so I thought I might add in here just in case you don't get a response. In general, hard money lenders cannot lend on primary homes. Owner financing is ok. Other loans are ok mostly. But HML are not because their fees and rates are too high. They would violate a lot of federal compliance laws. Again, this is "in general" but if you had the ability to do another loan type you could. I hope that helps in some way but feel free to tag me with any other questions.

Thanks @Andrew Postell . I can now see why that method doesn't work.  

How about distressed VA loans? Do you know if Listsource or other resources can connect a VA buyer with people that need to unload their inspection ready property before short selling or foreclosure?

@Joey Hernandez do you mean having a VA buyer purchase a home that is facing foreclosure? I guess it is possible but the VA loan needs about 30 days to close. Generally speaking we need a faster close time for properties in this status but I guess it could work in theory if there is a long enough closing period. If someone is buying their own primary home then why not just purchase it off the MLS though? You have tons of more options and your out of pocket expense is already as low as it can be. The "BRRRR" strategy of buying a property in disrepair is generally to keep an investors out of pocket costs to a minimum. With a VA loan, it's already as low as it can be. So buying a home off the MLS is totally ok if the main purpose is to purchase with as little out of pocket as possible. I hope that makes sense how I am describing it.

@Joey Hernandez
Sorry for the extremely late response. I have not tried this strategy, and as posted above, it probably will not work. I went with a conventional VA loan. (4.1% for a 30 year mortgage zero money down). My wife and I found the house we wanted (Large home built in 1900 with a potential rental suite above the garage for some house hacking). The home was "move-in ready" enough for the VA. Our realtor's husband is a local contractor and we were able to jump to the top of his construction project list and received a bit of a discount. We were able to work this due to the fact we bought the house using his wife (realtor). The renovation (reworking of a master suite by enlarging the master bedroom and installing a luxury bathroom) should be finished in a month and I'm projecting it will increase the value of the home by about $50k. We will be keeping the home as a long term rental as we project ourselves to be moving back to this area once I retire from the military to continue to raise our kids through High School.

Best of luck in your endeavors!

Originally posted by @Chase Stocki :

Backstory:

I'm in the military and have access to the VA loan with allows 0% down on a SFH up to $400k, a duplex up to $600k, and a quad up to $800k. The catch is the property must be move in ready and the VA sends inspectors to the property to ensure that it is. I have not found a clause that allows me to buy a property that is not move in ready and fix it up myself.

The Problem:

Houses in my area are extremely overpriced. There was a rise in the market during an oil boom, a massive flood, and people bought homes due to the lack of available rentals. The market has corrected itself, but the property owners have held tight to the prices so they don't lose money on their homes when selling. Therefore, in order to buy, I'm either going to over pay for a move in ready home, or purchase a fixer-upper. 

The Proposed Financial Solution Oversimplified:

I purchase a fixer-upper 'duplex' with a hard money loan (I'll do my homework and work the points, interest, and rehab into the loan), rehab the 'duplex' to my liking, move into one of the units (house hack) and rent the other unit, then use my VA loan to "refinance" the property with 0% down and low monthly payments (probably around 5% with my credit score hovering around the 800 mark).

Without getting into the VA loan weeds, is my proposed solution even legal? Does anyone know of anyone who has done this sort of financing for a home/multi-family?

All advice is greately appreciated.

Respectfully,

Chase

Hi Chase if your score is in the 800's you should be getting rates in the upper 3's to lower 4's not the 5's especially with VA loan product. This is as of march 20th, 2019 of course.

Additionally here are some important advantages with VA financing you have over other loan products:

- there is no title seasoning on VA so as long as you can document the value increase that has occurred either through your value adds or through the market increasing purely from buying a good deal you can refinance right away even for a cash out refinance unless conventional which requires 6 months and FHA which requires 12 months to use market value

- VA can finance up to 100% of your property's value which allows you to avoid lower appraisals as with conventional or FHA you have to get minimum 2.25-5% equity in order to refinance

- VA funding fee which is often pretty pricey (bordering hard money in terms of points charged 2.15 - 3.30 pts financed) can sometimes be waived if you have service connected disabilities or receive disability compensation for service connected injuries so check into this

- make sure you save all your contractor invoices and receipts so you can document the improvements especially if there is a very large gap between what price you paid versus what value you're pushing for on your appraisal

Hope that helps and good luck on your BRRR.

Originally posted by @Joey Hernandez :

Thanks @Andrew Postell . I can now see why that method doesn't work.  

How about distressed VA loans? Do you know if Listsource or other resources can connect a VA buyer with people that need to unload their inspection ready property before short selling or foreclosure?

You do sign an affdavit even for the local HML (hard money loan/lending) companies like veristone/raincity/intrust/redmond capital/builders capital/ eastside funding and others that you are buying this for commercial purposes and your intent/use will be for business only.

However, as with any humans, things can change and fix flippers in the puget sound area have once or twice been guilty of changing their mind to occupy some of the projects they originally intended to flip.

Many title data aggregators like listsource can find deeds that can locate properties with the last mortgage placed as VA indentified so you can target them, however be forewarned that WA state has laws that protect distressed home owners so soliciting primary occupants can be a big legal quagmire.

Best of Luck,