Hi everyone, I found a home through a connection that was left to owner in a will and is off market. The owner wants $300k for it and the sale of remodeled comparables in last 4 months is around $500K. I have done my due diligence and have brought in an inspector as well as my contractor who quoted 75K in repair costs. Even using HML this leaves considerable profit in the deal (like 60-70K)
I have found a hard money lender who will fund purchase, closing costs, and rehab for only 20% down on the purchase price for 10% interest and 2 points. My cash is tied up in other properties at the moment so I wanted to fund the downpayment ($60,000) with private money. I have two family friends who want to loan me the money for the downpayment. They dont want their names on the title in 2nd position behind the hard money lender (despite me telling them that will secure their loan), they just want to loan the money to me personally at 12% with a promissory note.
Does anyone have experience going this route? Will I violate any security laws doing this? Should they loan to my LLC that will purchase the home instead of myself? Will be meeting with a lawyer tomorrow but just wanted to gauge your thoughts first. Thanks!
I don't see anything wrong with it, and I've done it before as well. Loaning to your LLC sounds like the better way to go since it's the one buying the house and you keep all your costs in a business entity bank account so it's easier to track and deduct. As always, please confirm anything I (or anyone else on BP) says with your attorney (and perhaps a CPA).
I'd definitely double-check with the HML to see if they're okay with you receiving secondary financing. Some lenders won't like that and really want that money coming from you directly (and not a loan).
Keep in mind that you'll need more money than just down payment. Cash to close includes things like lender's points and fees, prepaid insurance, prepaid interest, and closing costs. You also need to have some money set aside for interest payments (usually lenders want to see 6+ months of it) and to start the rehab. Remember that most HML rehab loans are given in reimbursement draws, so you're required to spend your own capital on rehab first and make progress before they will give you that money.
Depending on where the property is, you may be able to get the same terms with only 10% down. That should also cut down your cash requirement.
I talked to my lender further, all closing costs, fees, interest, and points are paid at the end of the loan term or whenever the home is sold.