Rehab loans when you own house free and clear?- Westhampton NY

7 Replies

Hi BP,

To make a very long story short… I have the opportunity to take ownership of my mother's house and have the house free and clear; it's completely paid off. It is a single story ranch, 3 bedroom with full basement valued in the $397k neighborhood. With work it could be worth $500k +. The house needs serious rehab. I am thinking at least $150k. The lay out of the house is so poorly done, it's tempting to just knock the entire thing down and start over.

The house is located in Westhampton, NY, a very rich beach community where houses just minutes away sell for over $5 million. My house, after renovation, could rent for 20K for just the four months in the summer, or could be $3k/month year round. I am in a pretty good financial situation but I am still only 25 yrs old, and I don't want to deplete all my savings on rehabbing the house. In my research, it seems like most rehab loans are wrapped into a pre existing mortgages. Since I won't have one, are there any loans out there for just rehab?

Assuming you're not planning on moving into this place a hard money lender may be willing to lend for rehab. Its not that HMLs only lend for purchase. Rather, they simply want to be in first position. If you own the house free and clear and borrow from a HML, they're in first position.

You will need a plan for repaying the HML. Those are short term loans. Perhaps a refinance or some such.

Another option might be a refi or line of credit on the property from a bank. That will be MUCH cheaper than a HML.

You should consult with an accountant before doing anything.  There are significant and negative tax consequences if your mom gives you this house while she's alive.  Specifically, if a property transfers at death, the heirs get a stepped up basis based on the fair market value at the time of death.  When its transfered while the giver is alive, your basis is the giver's basis.  If that basis is lower, which is very often the case, you will pay more tax when you sell.

@jon holdman, thanks for advice. I have been so focused on financing and finding a good contractor, that I failed to investigate the tax implications. I am not planning on selling it but holding indefinitely… so right now I am not concerned about the capitals gains vs. stepped up basis. There is a $5.4 million lifetime gift giving limit, so hopefully I wont have to worry about taxes as long as I don't sell it. It was originally purchased for $180k so the capital gains are going to be significant if I do sell one day. But that also presents a problem in terms of going with a HML, since this won't be a quick fix and flip, paying back a short term loan may pose a problem. Can you refi without a mortgage

Stephanie, take your time and put together a good plan that gives you a very clear exit strategy. First you must decide if you will get properly paid for doing a rehab. This might be one of those deals where because of the personal nature of the property, you should just focus on the best selling strategy from a tax perspective.

Make sure you get several professional opinions before making up your mind. Best of luck!

Hi @Stephanie Lella  -

     I grew up in WHB (and coincidentally lived in Baltimore too), and am familiar with real estate in that area having helped my mom with the sale of her home in Remsenburg, and purchase of her home in Westhampton Pines.  I've also helped a few friends in the area with their rentals in that area, and some related issues.

    If you want to PM me the property address, that might help in the analysis of the situation.  If the neighborhood is A+ like many there are, financing a construction project is way easier then most of us BPers are used to, and hard money may not be necessary.  It's a somewhat unique area given the huge property values.

   There's a ton of options, so the more info you can provide, the better.



A "refinance" simply means getting a mortgage on a property you already own.  As opposed to a "purchase money loan" that's used to acquire a property.  You don't have to have a mortgage in place to refi.  However, there are a number of rules around cash out refi (i.e., a refi where the owner is taking more than $2000 in cash) and these are tougher to get than "rate and term refis" where the new loan is paying off an existing one with little or no cash to the owner.  You will need to qualify for the loan as far as credit and income.  But if you do you should be able to find a lender.  Try smaller, local banks or credit unions rather than the big banks.

Should you proceed... Unless you don't mind giving up your summer enjoyment of the house, or prefer to wait until the fall, you'll want to identify a contractor as soon as possible.  In that area they are about to get very busy on projects that owners want completed before "the season".  Once you get closer to spring they will have much less availability and likely charge you more.

@Dan, you are right, the closer to spring, the more contractors will be squeezed to get other summer rentals ready. I may have to wait until the fall since I am still negotiating the terms of this agreement with my family. 

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