Hard money financing, wholesalers, and a duplex w/ tenants

6 Replies

I wanted to throw this out to the community for a pressing question I have. I'm looking at a potential deal on a duplex that just was put under contract with a wholesaler. I'm looking towards hard money right now as our private money source is temporary out of the country and not able to give the go ahead on any acquisitions. What I am concerned about, however, is how this usually plays out when there are tenants in place on a lease (not sure yet when the lease expires). Construction budget is around $60k and we are headed into winter (aka rainy season) here in Oregon. I just don't want to be caught holding an expensive note with tenants living in a place unable to get into it to rehab and potentially already squeezed on a timeline due to weather.

You will need to honor the existing lease.  So, if you're planning to kick the tenants out and do the rehab, or even try to do the rehab with them in place you might have a problem.

How about just buying with a conventional loan then doing rehab when you have a turnover?

I would want to honor the tenant leases and make sure that they are out before doing a rehab. Problem is is that I don't think this place would qualify for a conventional loan due to the poor state it is in.

Hey Neal C. . Sounds like a fun deal. The background you've given leads to some additional questions. The hard $ situation comes down directly to math (more below). The bigger issues are what is it that you're buying? When are you going to get the leases to see what you're really dealing with in terms of tenancy? The wholesaler should have written in the contract a timeframe for when the seller would have to provide the leases for buyer's review. In Oregon, you're going to have to give 60 day notice to vacate if the tenants have been there more than 12 months. You may have longer than that if they're still in the middle of the lease. Most of your questions will be answered once reviewing those docs. In my experience it's always best to have a discussion with the tenants as well. The building needs 60K in work so I'm assuming rents are below market or the tenants are unhappy (or both?). Getting additional background and motivations of the tenants can be done when completing the estoppel letters. Can yo pay them to leave (cash for keys) early? Will they pay rent increases without all that work? Will they do a rent increase with a portion of that work? Are they potential "squatters" that you're going to have to evict even if you give them 60 day vacate? All of those answers will play into your financing scenarios. 

Can you get in contact with your private $ lender while they're out of town to get a feel for their appetite of this loan? Is it possible to acquire with hard $ at low points and high interest rate (1pt 18% maybe) and then refi once the private $ lender gets back in town?

Will hard $ or private $ rates kill the deal if you have a timely eviction on your hands? Can you extend closing and give 60 day notice prior to closing? Can you increase the price a little and have the current owner vacate the tenants? 

Bottom line is you're going to need those current leases, estoppel letters and a discussion with the tenants to better answer most of the questions. Is the duplex in a good part of town? Does any of this really matter given location, price and upside?

@Neal Collins  
Great news !! Really nice to see that you've been able to find a deal from the last time we met at the BP meetup. 

@Mike Nuss : Nice analysis. I'm thinking of asking you for more pearls of wisdom on the properties I find !! :)

@Mike Nuss  absolutely right about trying to work on getting them out so you can start the project

if you are looking at a buy and hold think about buying with HomeStyle renovation. 85% LTV, finance repairs up to 50% ACV, and just above conventional market rates. The big issue for you might be having to have the remodel completed in 90 days.

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