Construction loan or Hard money Lender for this deal?

Question

Hello everyone,

I am new to house flipping and have recently gotten into the game. I came across a home in the Bay Area that requires extensive work and essentially needs a full rehab. The home is essentially bare bones, with the wood being in good shape but requiring new drywall, flooring, a full kitchen rehab, a full bathroom rehabs, electric work, and repair of the septic system outside.

The total rehab cost is estimated to be around $150k-$200k, and I'm wondering if hard money lenders typically finance a deal that requires this much remodeling costs and still fund 100% of the rehab. The current purchase price is $185,000, but I would likely go over asking since this is what we are seeing in the Bay Area market, even for flips.

The ARV for the property is $770k, and currently it sits at 60% of ARV if funding the full rehab. Therefore, I believe this deal should pass a hard money lender's criteria.

Alternatively, would a construction loan be a better option, given that this project requires a lot of work?

Scott E. · Answer

Assuming your construction numbers are accurate and the comps support your ARV, a hard money lender should fund 70% of the purchase and 100% of the rehab on this deal.

Mike Klarman · Answer

Upside down bridge loans are not a lenders favorite.  The number one bridge loan lender in the country won't do it.  I know a few outfits that will look at them but they will ding you on the leverage and the rate.

Remember too that most lenders will lend on the lesser of As-Is and the Purchase price.  So if you buy this for 200k let's say and the lender's appraisal comes back at 160k then they will give you 80% - 85% of the as-is, not the purchase.  The premium they feel you paid will be on you.

It will also depend on your experience, do you have 10 projects under your belt or none?  Pricing is so dependent on many factors, especially the bridge loans.

Dennis Muno · Answer

Hello Kevin,

So for a construction loan what is your experience with you on title in the last 36 months? Most lenders would like to see a minimum of three projects with you on title in that time frame to assist you. If you don't have that experience on title you probably will have a hard time doing this.

I think private money or hard money or a fix and flip loan would be best for this scenario. They usually will lend to you but at a higher interest rate(for hard money and fix and flip loans) usually interest only for a duration usually for not more than 1 year. That will allow you to do the project and then later refinance to a more sensible loan with favorable terms and a lower interest rate.

Keep in mind: a construction loan will have the barrier of required experience. If you don't have it, you'll run into serious issues getting approved for a construction loan. Hard money, private money, fix and flip loans are possible ways to go about this that will help you. If these project will not last more than a year these are ways to go

Matthew Crivelli · Answer

@Kevin G.

The answer - Maybe

Questions -

1. Does the project involve adding an addition, changing the unit type, or fixing structural issues ?

2. Are there RECENT (<6 months)  sale comps within a few miles of the subject property? In other words, can you back up your ARV project?

3. Do you have good financials? (cash & credit)

If you are okay with a large down payment and the project is actually feasible, you can likely get a hard money lender to fund maybe 65-70% of the purchase + the full rehab amount. With the purchase price and rehab amount almost even with one another + you being a new investor = larger down payment & more due diligence prior to closing. But, it can be done in the right situation!

Construction loan or Hard money Lender for this deal?

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