Financing a rehab and flip

[Moises Silva]

Hello, 

My name is Moises. Recently in this year I sold my first home and relocated to Houston in which I purchased another primary residence. I been researching and doing homework on potentially taking on a rehab project and flipping it once done, I have a few properties/areas in mind.  I spoke to my lender and they advised me to wait a year or 2 before applying for another mortgage since I just purchased my primary residence.

I was thinking of looking into a Hard Money loan instead of traditional lending in order to start this project, in hopes of selling the property once fixed and paying off the loan. Any recommendations or advice will be truly appreciated.   

[Logan Singleton]

Hi @Moises Silva, 

Congrats on your recent move! Most hard money lenders can lend you up to 90% of the purchase price and 100% of the rehab costs with a 12-month term and a rate of 10.49-12.49%

Hard money lenders issue what's called an asset-based loan, so they will consider the property itself along with its potential future value, not your personal financial situation. This means you will not have to provide paystubs, W2s, or 1099s.

I'm happy to connect and discuss further!
 

[Wale Lawal]

@Moises Silva

Hard money loans are short-term loans used for rehab projects and house flips that provide quicker access to finance. They have higher financing rates and costs since lenders consider the property's after-repair worth. They may close fast in competitive markets, with an LTV ratio ranging from 65% to 75 percent. A backup plan may include renting or refinancing the debt. Remember to run the numbers cautiously and with a clear exit strategy.

Good luck!

[Mike Klarman]

So, Houston is tough. Very competitive. None of the MLS listings work and the off-market properties are in control of the wholesalers who are very greedy there for some reason. They are selling you a bone with very little meat on it and ppl take it cause it's that hard to get into something there. I looked into the Texas markets: Dallas, Houston, SA. Same story in all three. Idiots with cash overpay and it prices out the smart investor.

You'd have to acquire properties at the auction/sherif sale level.  That gives you the best price on your asset and you avoid any market competition.  You then can apply for financing after you close in cash - so you have to be liquid.  You gotta pick something up for like 100k cash that is worth 150k or more as-is and fixed up 300k+.  Then after you close apply for delayed financing which cashes you out of the purchase and includes escrowed rehab funds for the fix.  

[Moises Silva]

Quote from @Mike Klarman:

So, Houston is tough. Very competitive. None of the MLS listings work and the off-market properties are in control of the wholesalers who are very greedy there for some reason. They are selling you a bone with very little meat on it and ppl take it cause it's that hard to get into something there. I looked into the Texas markets: Dallas, Houston, SA. Same story in all three. Idiots with cash overpay and it prices out the smart investor.

You'd have to acquire properties at the auction/sherif sale level.  That gives you the best price on your asset and you avoid any market competition.  You then can apply for financing after you close in cash - so you have to be liquid.  You gotta pick something up for like 100k cash that is worth 150k or more as-is and fixed up 300k+.  Then after you close apply for delayed financing which cashes you out of the purchase and includes escrowed rehab funds for the fix.  

Thank you @Mike Klarman This is very insightful. I have been looking into the auctions and was thinking the same thing. Really appreciate the breakdown this actually clears up a lot for me. 

[Erik Estrada]

Quote from @Moises Silva:

Hello, 

My name is Moises. Recently in this year I sold my first home and relocated to Houston in which I purchased another primary residence. I been researching and doing homework on potentially taking on a rehab project and flipping it once done, I have a few properties/areas in mind.  I spoke to my lender and they advised me to wait a year or 2 before applying for another mortgage since I just purchased my primary residence.

I was thinking of looking into a Hard Money loan instead of traditional lending in order to start this project, in hopes of selling the property once fixed and paying off the loan. Any recommendations or advice will be truly appreciated.   

 Hi Moises, 

Is there a reason why your lender is recommending this? If you are planning to buy another primary, you will need to wait a year to satisfy the occupancy requirement for your current loan to buy another primary and keep your current as an investment. The primary in most cases will need to be an upgrade from your current residence, depending on the loan program. If however you are buying an investment property, I am not aware of a 1 year requirement to buy an investment. With some investment programs you do not need to be a current homeowner to qualify for a loan. 

Since your goal is to flip, I would look into short term financing since you will be able to easily finance 100% of the repairs. Be prepared to put at least 20-25% down since you would be considered a first time flipper. 

[Ko Kashiwagi]

It sounds like your lender is more so a conventional lender/bank. For flip projects like you mentioned, it's best to talk to brokers/lenders specialized in hard money financing. Whether you should use a hard money, broker or private money would depend on your goals & priority (speed, communication, pricing, etc) so highly recommend considering a variety of options!

[Moises Silva]

Quote from @Erik Estrada:

Quote from @Moises Silva:

Hello, 

My name is Moises. Recently in this year I sold my first home and relocated to Houston in which I purchased another primary residence. I been researching and doing homework on potentially taking on a rehab project and flipping it once done, I have a few properties/areas in mind.  I spoke to my lender and they advised me to wait a year or 2 before applying for another mortgage since I just purchased my primary residence.

I was thinking of looking into a Hard Money loan instead of traditional lending in order to start this project, in hopes of selling the property once fixed and paying off the loan. Any recommendations or advice will be truly appreciated.   

 Hi Moises, 

Is there a reason why your lender is recommending this? If you are planning to buy another primary, you will need to wait a year to satisfy the occupancy requirement for your current loan to buy another primary and keep your current as an investment. The primary in most cases will need to be an upgrade from your current residence, depending on the loan program. If however you are buying an investment property, I am not aware of a 1 year requirement to buy an investment. With some investment programs you do not need to be a current homeowner to qualify for a loan. 

Since your goal is to flip, I would look into short term financing since you will be able to easily finance 100% of the repairs. Be prepared to put at least 20-25% down since you would be considered a first time flipper. 

My lender is recommending I fulfill the occupancy requirement. He was recommending to save for a year and rent out my current residence and then purchase a new one and continue this strategy until I have steady rental income. We went over some options for a conventional mortgage, however I was trying to to purchase a rehab and ideally sell it within the same year.

[Bruce Lynn]

Quote from @Mike Klarman:

Then after you close apply for delayed financing which cashes you out of the purchase and includes escrowed rehab funds for the fix.  

One trick here in Texas is typically you can't get title insurance on a sheriffs deed for 2 years after the sale, so you have to sit on those for 2 years before you get financing.  It's also pretty rare to get anything for $100K that is worth $300K fixed up.  I've gone to 1-2 sheriff's sales every month for nearly 10 years and regularly buy.   Also typically you don't want to do any cosmetic repairs for 2 years, because of the redemption and challenge periods.  All that work/expense is not recoverable and could be wiped out.  Rare anyone redeems 100K house, but I can almost guarantee if you rehab it before the two years is up, someone will show up, redeem and you just remodeled their home for FREE.

As far as hard money loans go typically around Houston you'll pay 2% origination fee and probably 12-14% interest for six months.  Also many lenders will want to see you have some nice reserves like 15-25% of the purchase price on your first deal.  So make sure you have some cash reserves built up.  Talk to the hard money lenders that are local in your market.  They know the comps, the rehab costs and the timeframes.  The good ones will help keep you out of the bad deals and can help you with your numbers to make sure it is a good deal.  You need it to be a great deal and be very very quick on your rehab to make those numbers work.

Another solution is to stay in your current home a year, then turn it into a rental and buy another house that needs work with a owner occupied rehab loans.  While plenty of lenders will tell you they can do them, find a lender that does lots of them.  Like 2-3 a month or more.  They're a little trickier than normal owner/occupied loans so you want an expert walking you thru it.  

Good luck.

[Peter Walther]

Find a real estate investment group in your area and see if you can find an experienced investor you mesh with.  Work with him/her and get some experience before you try it on your own.

[Jason Hirko]

Quote from @Bruce Lynn:

Quote from @Mike Klarman:

Then after you close apply for delayed financing which cashes you out of the purchase and includes escrowed rehab funds for the fix.  

One trick here in Texas is typically you can't get title insurance on a sheriffs deed for 2 years after the sale, so you have to sit on those for 2 years before you get financing.  It's also pretty rare to get anything for $100K that is worth $300K fixed up.  I've gone to 1-2 sheriff's sales every month for nearly 10 years and regularly buy.   Also typically you don't want to do any cosmetic repairs for 2 years, because of the redemption and challenge periods.  All that work/expense is not recoverable and could be wiped out.  Rare anyone redeems 100K house, but I can almost guarantee if you rehab it before the two years is up, someone will show up, redeem and you just remodeled their home for FREE.

@Bruce Lynn isn't there a shorter redemption period if the property wasn't homesteaded? I want to say 6 months but I'm not 100% sure.

[Bruce Lynn]

Quote from @Jason Hirko:

@Bruce Lynn isn't there a shorter redemption period if the property wasn't homesteaded? I want to say 6 months but I'm not 100% sure.

That is what people tell you.  So the law says if it is NOT homestead, not ag, not minerals, the redemption period is only six months.  However, how do you prove it is not a homestead? A good attorney will tell you it is my homestead if I say it is, nearly impossible to prove/disprove what was someone's thought process.  Plus there is a two year potential challenge period.  So in most cases title companies won't issue title insurance on a tax sale property for two years after the deed is filed.  So for most people, most circumstances, most situations, realistically your cash and rehab is held up for 2+ years.  You are at risk if you start rehab before that period, and/or try to resell the property before that.
Some if not most people think, well there was no homestead exemption filed, so there is no homestead.  That's wrong.  The exemption is for tax purposes/discounts, not the legal definition of homestead.  You can have a homestead all day long without filing a tax exemption.  That is actually pretty common, although the law regarding filing the tax exemption has changed in the past couple of years, before you could buy for example a house any day in 2024, but the new tax exemption could not be filed until Jan 1, 2025.  That doesn't mean the house wasn't your homestead.  Also just because you have a tax exemption doesn't mean it is legally your homestead.  Think about two single people who both have homes in different counties with tax exemptions.  Get married and move into one house.  Forget to remove one of the exemptions.  You can only have one homestead.   So that could get challenged....homestead is more complicated than just filing or having a tax exemption.  For fun you can see recently in Texas people going to jail for homestead disputes. https://www.houstonchronicle.com/politics/texas/article/lovi...   although that is a little off topic for this discussion.

[Bruce Lynn]

Quote from @Jason Hirko:

Just to double check, because I know nothing about lending side, do you have any loan product for rehabbers where title insurance is not required?

Let's say I buy at tax sale, I want your rehab money 30 days later, would you lend to me for the rehab without security of the property?

What kind of reserves are you looking for, 1st time rehabber, financing 75% of ARV and 100% of rehab?

[Peter Walther]

Quote from @Bruce Lynn:

Quote from @Jason Hirko:

@Bruce Lynn isn't there a shorter redemption period if the property wasn't homesteaded? I want to say 6 months but I'm not 100% sure.

That is what people tell you.  So the law says if it is NOT homestead, not ag, not minerals, the redemption period is only six months.  However, how do you prove it is not a homestead? A good attorney will tell you it is my homestead if I say it is, nearly impossible to prove/disprove what was someone's thought process.  Plus there is a two year potential challenge period.  So in most cases title companies won't issue title insurance on a tax sale property for two years after the deed is filed.  So for most people, most circumstances, most situations, realistically your cash and rehab is held up for 2+ years.  You are at risk if you start rehab before that period, and/or try to resell the property before that.
Some if not most people think, well there was no homestead exemption filed, so there is no homestead.  That's wrong.  The exemption is for tax purposes/discounts, not the legal definition of homestead.  You can have a homestead all day long without filing a tax exemption.  That is actually pretty common, although the law regarding filing the tax exemption has changed in the past couple of years, before you could buy for example a house any day in 2024, but the new tax exemption could not be filed until Jan 1, 2025.  That doesn't mean the house wasn't your homestead.  Also just because you have a tax exemption doesn't mean it is legally your homestead.  Think about two single people who both have homes in different counties with tax exemptions.  Get married and move into one house.  Forget to remove one of the exemptions.  You can only have one homestead.   So that could get challenged....homestead is more complicated than just filing or having a tax exemption.  For fun you can see recently in Texas people going to jail for homestead disputes. https://www.houstonchronicle.com/politics/texas/article/lovi...   although that is a little off topic for this discussion.

Just to clarify, I believe you have to actually own the property for it to be your homestead so unless they bought the house they moved into as tenants in common before the marriage, they would have needed to exchange deeds after.

[Moises Silva]

Quote from @Bruce Lynn:

Quote from @Jason Hirko:

@Bruce Lynn isn't there a shorter redemption period if the property wasn't homesteaded? I want to say 6 months but I'm not 100% sure.

That is what people tell you.  So the law says if it is NOT homestead, not ag, not minerals, the redemption period is only six months.  However, how do you prove it is not a homestead? A good attorney will tell you it is my homestead if I say it is, nearly impossible to prove/disprove what was someone's thought process.  Plus there is a two year potential challenge period.  So in most cases title companies won't issue title insurance on a tax sale property for two years after the deed is filed.  So for most people, most circumstances, most situations, realistically your cash and rehab is held up for 2+ years.  You are at risk if you start rehab before that period, and/or try to resell the property before that.
Some if not most people think, well there was no homestead exemption filed, so there is no homestead.  That's wrong.  The exemption is for tax purposes/discounts, not the legal definition of homestead.  You can have a homestead all day long without filing a tax exemption.  That is actually pretty common, although the law regarding filing the tax exemption has changed in the past couple of years, before you could buy for example a house any day in 2024, but the new tax exemption could not be filed until Jan 1, 2025.  That doesn't mean the house wasn't your homestead.  Also just because you have a tax exemption doesn't mean it is legally your homestead.  Think about two single people who both have homes in different counties with tax exemptions.  Get married and move into one house.  Forget to remove one of the exemptions.  You can only have one homestead.   So that could get challenged....homestead is more complicated than just filing or having a tax exemption.  For fun you can see recently in Texas people going to jail for homestead disputes. https://www.houstonchronicle.com/politics/texas/article/lovi...   although that is a little off topic for this discussion.

 Thank you for this Bruce ! from what i was told was the same that this period is 6 months, but if i run the risk of this happening then that changes things. I have 20 % of my target purchase price , so I will try and reach out to local lenders and see if they can provide some insight 

[Bruce Lynn]

Quote from @Peter Walther

We are a community property state.  Probably the strongest community property state.  Once you move in the spouses house, pretty much becomes community property from that point forward with homestead rights.  Don't have to be on the deed even to declare it your homestead.

[Peter Walther]

Quote from @Bruce Lynn:

Quote from @Peter Walther

We are a community property state.  Probably the strongest community property state.  Once you move in the spouses house, pretty much becomes community property from that point forward with homestead rights.  Don't have to be on the deed even to declare it your homestead.

It may be splitting hairs, and I may have been unclear in my initial post, but I believe homestead laws are designed in part to protect non-title holding spouses, so if the new wife moves into her husband's house he cannot sell or mortgage without the wife's consent nor can it be forced to be sold to pay involuntary creditors (as opposed to voluntary creditors such as mtg/DOT lenders). Therefore, while it's not the wife's homestead, she gets the benefit of it being her husband's homestead. Even if the husband doesn't live there but his wife does, it can still be his homestead, and the wife gets the protection. I found Texas to have some of the most convoluted homestead laws and so had to tread carefully in making requirements for title insurance. Deciding if it was a borrower's homestead could be difficult. It was only a few years ago that Texas even allowed 2nd DOTs on homestead property.

[Bruce Lynn]

Quote from @Peter Walther:

It's not all that crazy....concept kind of goes back to the wild west....which when you think of it wasn't that long ago (150 years?) Maybe even then women weren't allowed to be on the deed or get mortgages. Not sure when all that changed. They didn't want men gambling away the house in a poker game and leaving the women and children without a place to live.

The intent I think for a home to be designated your homestead is that is where you live. Some people use that term lightly, but you can only have one "homestead". So the wife would be exercising her homestead rights if she moves in and that is her primary residence, not her husband's right. We've had DOT 2nds on homestead for as long as I can remember, which is only about 25 years. Remember the old 80/10/10 or 80/15/5s. You might be thinking of home equity 2nds, which is newer concept for us. Can't remember when that changed, maybe 10 years ago.

So spouse often does not need to be on the deed, but can be on deed of trust when they buy.  When they sell, title co may require signature of spouse even if they are not on the deed.  That prevents one spouse from selling a property with homestead rights without knowledge of the person sharing those.   Makes sense to me, but lots of arguments at closing table between title and purchaser/seller on who needs to sign.   We try to set people up for success day 1, but often they don't listen.

[Peter Walther]

Quote from @Bruce Lynn:

Quote from @Peter Walther:

It's not all that crazy....concept kind of goes back to the wild west....which when you think of it wasn't that long ago (150 years?) Maybe even then women weren't allowed to be on the deed or get mortgages. Not sure when all that changed. They didn't want men gambling away the house in a poker game and leaving the women and children without a place to live.

The intent I think for a home to be designated your homestead is that is where you live. Some people use that term lightly, but you can only have one "homestead". So the wife would be exercising her homestead rights if she moves in and that is her primary residence, not her husband's right. We've had DOT 2nds on homestead for as long as I can remember, which is only about 25 years. Remember the old 80/10/10 or 80/15/5s. You might be thinking of home equity 2nds, which is newer concept for us. Can't remember when that changed, maybe 10 years ago.

So spouse often does not need to be on the deed, but can be on deed of trust when they buy.  When they sell, title co may require signature of spouse even if they are not on the deed.  That prevents one spouse from selling a property with homestead rights without knowledge of the person sharing those.   Makes sense to me, but lots of arguments at closing table between title and purchaser/seller on who needs to sign.   We try to set people up for success day 1, but often they don't listen.

You're right, both about me thinking about HELOCs and not 2nds and the rational for the protection of the homestead.  The state didn't want to have to take care of the families of men who gambled the family farm away.  Again, not to split hairs, she's exercising her rights that arise because it's his homestead not hers.

Generally, a deed is prepared showing the grantor's marital status. If (S)he's a single person, no problem, that's the only signature required. If married, then there should be either a recitation the property is not the homestead of the grantor, or the spouse needs to sign. Same applies for a borrower on a DOT. Of course, if it later turns out the grantor/borrower lied and was married and the property was the homestead, the title insurer has a problem, unless the DOT was for the purchase of the property. That's a whole other discussion. I handled homestead claims more than once.

[Dave Skow]

@Moises Silva- if you purchase next one as a rental - getting traditional financing should be best route to take ..you will need min of  15% down 

[Janet Pritchett]

Quote from @Moises Silva:

Hello, 

My name is Moises. Recently in this year I sold my first home and relocated to Houston in which I purchased another primary residence. I been researching and doing homework on potentially taking on a rehab project and flipping it once done, I have a few properties/areas in mind.  I spoke to my lender and they advised me to wait a year or 2 before applying for another mortgage since I just purchased my primary residence.

I was thinking of looking into a Hard Money loan instead of traditional lending in order to start this project, in hopes of selling the property once fixed and paying off the loan. Any recommendations or advice will be truly appreciated.   

 Hi Moises!  Congrats on your move & new place! :)  Hard money is a great way to get started - you can possibly finance 100% of the purchase plus rehab and then walk away with a profit. In my area, central Indiana, there are still great fix and flip opportunities! Let me know if you'd like to chat further about it! 

[Carole Parker]

Hi Moises,

Congrats on selling your first home and making the move to Houston! It's great to hear that you're already thinking about diving into your first rehab and flip project. It sounds like you're on the right track with your research and considering financing options like hard money loans.

Hard money loans can definitely be a viable solution when traditional lending isn't an option, especially if you want to move quickly on a project. These loans typically offer more flexibility and faster approval processes, which can be helpful in the fix-and-flip world. The key things to keep in mind are interest rates, loan terms, and ensuring you have a solid plan for the rehab timeline and sale.

I sent you a connect request. I'd be happy to connect with you! Let me know if you want to know more about private money lending. 

Looking forward to hearing from you!

Best regards,
Carole

[Aron Sperber]

Quote from @Moises Silva:

Hello, 

My name is Moises. Recently in this year I sold my first home and relocated to Houston in which I purchased another primary residence. I been researching and doing homework on potentially taking on a rehab project and flipping it once done, I have a few properties/areas in mind.  I spoke to my lender and they advised me to wait a year or 2 before applying for another mortgage since I just purchased my primary residence.

I was thinking of looking into a Hard Money loan instead of traditional lending in order to start this project, in hopes of selling the property once fixed and paying off the loan. Any recommendations or advice will be truly appreciated.   

 Hi Moises 

It sounds like you’ve made some significant moves with your recent home sales and relocations. Congratulations on considering your first fix-and-flip project!

At ASRE HOLDINGS LLC, we understand that navigating traditional financing options like mortgages can sometimes be challenging after purchasing a new primary residence. A hard money loan could indeed be a great alternative for your current plans, especially if you're eager to get started on your rehab project sooner rather than waiting for a conventional mortgage approval.

Our fix-and-flip loans are designed specifically to provide real estate investors like yourself with flexible, short-term financing solutions. These loans not only cover the property purchase but also 100% of the renovation costs, allowing you to focus on the project without worrying about securing additional funding.

Here’s how our loans work:

• Loan coverage: We can finance up to 90% of the property purchase price and 100% of the rehab costs.
• Max ARV (After Repair Value): Depending on your experience level, we offer up to 75% of the ARV, ensuring that your project has strong financial backing.
• First-time investor friendly: If this is your first fix-and-flip, don’t worry. We have loan options tailored for new investors, so experience isn't a barrier.
• Flexible credit requirements: Even if your credit score isn’t at the highest tier, we have different loan tiers that can accommodate various credit ranges.

We can also work with you to ensure the loan structure matches your timeline and project goals, enabling you to start, complete, and sell the property with confidence.

I'd be happy to discuss more about how we can assist with your project. Let's Connect!

[Juan F Alvarez]

Moises, if you are planning to make it a business and you will be doing it frequently you will not be able to use traditional financing to scale up, which is the reason you have to go with asset based (hard money) lending, where we are not going to look at your debt to income ratio, like traditional banks do. 
For the most part, the good deals are going to be found with wholesalers and usually cash or hard money, since they want quick closings. A hard money lender will take about 7-10 business days to close on a loan, which will help you buy properties below market. In flipping you will make your money when you buy the property, therefore quick access to funds is crucial, and that's why it's very difficult to flip a traditional MLS based purchase. You will usually not get a good enough deal, and you will be competing in the purchase against retail buyers, especially in today's market.

Hard money lenders, since we are asset based, will go based on the asset - we will look at your credit and experience for terms - but we don't go into your personal accounts and we don't care how many properties you are flipping at one time, or how many loans you have open. We can provide quick quotes which serve as proof of funds when purchasing from a wholesaler, and can close quickly. 
I'll be happy to help if you'd like to connect, send me a connection request and I can guide you thru the process