Money To Complete Rehab on a Home with No Mortgage

24 Replies

Hi all,

I bought a foreclosure for cash ($28,000) and have put $50,000.00 cash into it. The heavy, big work has been done and now it's the final touches. Flooring, and kitchen/bath furniture - and I'm done! Two brokers have given me listing estimates of $100,000 - $130,000. 

I would like to pull some money out to complete the work - about $15,000-$20,000. I owe nothing on the house and I thought this would be straightforward. But, apparently, it's not. 

My local bank tells me I have to qualify for a brand-new mortgage in order to take any money out of the house. But, even though I own another home besides this one, make a mid-six figure income and have excellent job security (cybersecurity), and a DTI ratio of 13% - I can't qualify because my FICO score (612) is too low. (Nasty divorce last year - husband didn't pay my bills while I was out of the country several months - although I sent him the money. I only discovered this recently - but, I am cleaning up my credit. Paying off the things that I don't even "need" to - because it's the right thing to do... But it will take years to get it up where they want it 670 or higher.) In the meantime, my house sits 90% complete. Should I sell it unfinished - and take the significant hit - after all the months of work or ---- ?

I approached a hard money lender - but again - my score is too low. So, even though I own this home free and clear - and need very little to get it on the market and repay the loan - I seem to be out of luck. I am writing this here to ask if anyone has run up against this - and if they have any resources or suggestions for someone in this situation.

Any and all suggestions will be gratefully considered!

Thanks in advance - !

Yikes! Sticky situation indeed! Talk to everyone in your sphere of influence. Attend REIA meetings, keep talking to hard money lenders, keep talking to banks.

From what you say, SOMEONE should be willing to give you money pledged against your equity.  Just keep talking, keep pitching,  keep trying.  If you don't have a timeline thats FORCING you to sell then exhaust every option you have.  You'll get it.  Just keep trying

Quick question before I give advice -- based on the cost numbers ($28K purchase, $50K rehab, additional $15-20K rehab, plus any purchase/holding/selling costs), it appears that there's a good chance you're going to break even or lose money on this deal.

Are you prepared to do that?  Let's say you're all-in to the property for $110K and sell it for $100K.  How are you going to feel having to repay the lender and then take a loss of $10K?  Is that something you're prepared to do?

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I don't see it working for you. Also, the BIG spread in possible listing price makes me curious. Some brokers or agents will give a super high unrealistic number to get listings. Those operators won't do you any good and your property won't sell for more than it is worth on the open market. 100K-130K? Somebody is dreaming, lying, or just doesn't know better.

you don't owe a mortgage, so there is no time clock ticking away for paying this back (plus interest). you also mentioned you have a full time job that sounds like it pays well. why not take a break, save the money you need, or pay as you go per project using your paycheck. if you haven't had to borrow money at all for this project, why start now?

@Chana O'Leary ,

Have you talked to anyone about credit repair? You should be able to clean some of it up in months, not years, though it may be tough getting up to the 680 range, depending what your credit profile looks like over all.

My investing group's credit expert is one of the top people in the country. He even serves as an expert witness in credit-related litigation. I can refer you, if you'd like.

That said, the others are right - you are quite close to a break-even / lose money proposition on this deal unless you can minimize the costs to finish it and sell it. Looks like you hit the wrong hard-money lender. They should be looking at the deal, not your credit. If they're looking at your credit, well, that speaks volumes about the deal.

Depending where you're living now, you might even do better to move into it while you finish it, then put it on the market.

Thanks to all who've responded - these are all good thoughts and great advice.

The only timeline for completion is that the house is just sitting there and I'm paying taxes on it and will be paying to keep it heated this winter. I had been thinking about moving into it for 18 months (avoiding capital gains) - and selling my other home, anyway - while I finished up landscaping and such.

The market where I live is schizophrenic (prices are all over the map) - and I'm not impressed with the small pool of realtors that work in up here (northern (like two minutes from Canada) New York) . Not a very creative or professional bunch from what I've seen so far. The wildly differing numbers weren't a surprise at all...

Getting it to the point where I can live in it will still take at least $15,000. But, doing it paycheck to paycheck may be the only option. Still - not a bad one overall. 

The credit score is moving in the right direction - glacially. But, at least it's in the right direction. I just got a notice today that Equifax moved up 6 whole points! Yay? Well, like I said - it's in the right direction. As to the hard money lender thinking the deal was "bad" - it never got to those kind of specifics - they have an FAQ on their website - "no scores under 640". Period, So, they weren't making a judgment about the viability of my particular deal.

As to the "break-even/lose" issue - well, I've learned so much while working on this house. The education alone has been so valuable and, honestly, I can't put a price on that. If I just break even - I'm "OK" with that. If I can recoup all of my original investment - and I'm pretty confident I can do that at least - then I'll feel "OK" about the deal. Lessons learned and move on... :-)

(With a higher credit score, natch. .. :-)

Thanks again...

Do you belong to a credit union or have a 401k plan you can borrow from?  Its not very much money and if you put the deed up as collateral I can't believe you can't get 20 k to finish it up quickly and move in or see what the market does for you.  If you tap a loan from your 401k it will be low interest, won't show up on your credit report and be low payments as well.  Sorry you are going thru this but I think many lenders will put up the cash and use the deed for collateral. The credit union is a good bet as well since you are a member and should be able to help you out.   Good luck!

@Chana O'Leary Sorry, am I misunderstanding something? You make mid 6 figures, thats around 500k a year? so say 30-40k/mo? If you wait 2 paychecks or 1, then everything should be cleared right?, I mean, even at 35% tax deduction, you'll net 20k in one month.

@Charlie DiLisio Hi Charlie, thanks for your reply. In response to your questions, no, I don't have a 401K or credit union membership. And your surprise echoes mine. I had thought with the deed as collateral, my good income and low DTI ratio and the fact that I have put $75,000 of cash into the property - that it would not be an insurmountable problem.

But, as I have learned - not all hard money lenders loan in every state and they have credit requirements posted on their websites. Even the ones who loan in NY state focus on the City - not the small northern towns. Local banks won't talk to me about a mortgage (they would consider this is a new mortgage) with a low FICO score. I have approached two mortgage brokers - one local and another in Maryland who loans in NY. Again, nothing for my FICO score (for them I need 640). It doesn't qualify for FHA because it is still not considered habitable. (No floors or kitchen/bathroom furnishings.) There are no REI or even real estate meetups in this part of the world for networking. So, the options are somewhat thin up here.

If push comes to shove, I will just have to take the six months to complete it piece-meal. And try to get it on the market in the Spring. 

Originally posted by @Manolo D. :

Chana O'Leary Sorry, am I misunderstanding something? You make mid 6 figures, thats around 500k a year? so say 30-40k/mo? If you wait 2 paychecks or 1, then everything should be cleared right?, I mean, even at 35% tax deduction, you'll net 20k in one month.

I find it weird, but a lot of people say "mid six-figures" when they mean around $150K...

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@J Scott Now that the issue has come up - I have to admit - I really never thought about it! But now that I AM thinking about it - it makes perfect sense to think of $500,000 as "mid-six-figures".  Unfortunately, that is NOT my present situation! :-)

Originally posted by @Jennifer L. :

@Chana O'Leary You can probably do a lot to repair your credit.  Take a look at the forums at MyFico.  There is a lot of good information there.  Good luck!

A word of GREAT caution attempting to self-repair your credit... DON'T EVEN THINK ABOUT IT unless you are a credit expert. You may do more damage than good!

Example:

If you use ANY on-line dispute systems, you effectively relinquish the right to request verification of a disputed item and to request to be notified if any items removed from your credit report are re-inserted. Effectively, any items disputed electronically become almost impossible to remove, regardless whether they are inaccurate or not.

The on-line websites won't tell you this.

Use postal ("snail") mail, ONLY!

Originally posted by @David Dachtera :

A word of GREAT caution attempting to self-repair your credit... DON'T EVEN THINK ABOUT IT unless you are a credit expert. You may do more damage than good!

Credit repair on your own is simple -- pay off your debts, pay your bills on time, and within two years, your credit will be good as new.  I've "coached" people on how to repair their credit on several occasions (I'm not an expert -- I just go by common sense and what I've read), and I've had several people I know go through credit counseling.  In the end, both groups had about equal success -- but the credit counseling group ended up paying $100-300 per month to end up in the same place.

If you need to dispute a credit item, go online and there are some very thorough articles that will walk you through the process.  As David said, there are some gotchas if you don't do your research, but it's not rocket science if you do a little reading upfront.

Just like many other things, credit "gurus" make their money be scaring you into paying them...

I am in a similar situation. I purchased a property for $28,000 and didn't have the funds for the rehab. I am working with a company called GroundFloor that's lending the rehab funds for my deal based on my ARV. They do run your credit to base what your interest rate will be. I know they lend in New Jersey, but not sure about New York. I will let you know how it works out for me this week. I hope this helps.

Good luck!
Chris

Hi Chandra

You said that you own another home ( your primary residence). If you have enough equity you can pull the money out of that home. FHA will go to an 85% LTV on cash out refinance down to a 580 credit score. If you refinance your primary and take the cash out, problem solved and you will do better rate wise as an FHA 30 year fixed with no points is around 3.125% vs. a rehab loan that can cost 7-12% for 12 months or less with several points.

Also, I agree with some of the other comments that you won't have much if any profit built in to this deal when you are done. You may want to rent it out and wait until the market gets stronger. This way you can cash flow the property while you hold at no cost and let the equity build. Again, assuming that the market that it's in is on the upswing.

Hi Chandra,

    I would say you might want to have the house you are working on rented if it is in "livable" state. At least just to keep your monthly expenses covered for that property. And eventually this can help fix your credit report too since you are paying mortgage and tax on time. Just make sure when getting tenants to do proper background screening so you don't end up with a bad tenant not paying the rent.

There is not much spread looking at the numbers you have mentioned and you might hit a loss if you try to fix and sell the house asap.

I hope you get your issues be resolved soon. Good luck. 

--Jeff

It sounds like you are over-building this thing.  I would get in there myself and invest some sweat equity (free). I agree with @Ryanne Hodson, and cash flow this thing myself. Slow down and save some money. If the brokers are correct, you will be close to a breaking even after commission.  Sounds like you bought a fixer at a great price and put high-end finishes in a mid-end house. I know you learned a lot on this project. Far more than a weekend seminar. At least you are out there doing it. A lot of people on this site are onlookers, not investors. Take advice here with a grain of salt. Good luck and God bless.

www.straightlinefunding.com 
They are a true hard money lender asset based. And as far as your credit is concerned use www.lexingtonlaw.com to clean up negatives off of your report if your interested in using an effective credit disputing service.

@Christopher M. I went and checked out GroundFloor - but unfortunately,they aren't in NY yet. Still, they looked interesting from an investment standpoint - as well as a borrower. I'm going to explore their business model a little further. Thanks for the pointer. I appreciate it!

@Joseph Scrocca Unfortunately, my home would not qualify for FHA. It is off-the-grid and uses solar power exclusively. Also, my septic tank is too close for FHA requirements - and the well is probably too close given their requirements, as well. I did talk to a bank about pulling some out - unfortunately, I've only owned it six years and the market up here does not appreciate rapidly. So, there's really nothing to pull out at this point - especially given the kind of house it is. (I love it - but bankers don't "get" 100% solar at this point.

As to the flip house - I would rather sell it on a land-contract than rent it out up here. This is a prison community -  it's just not someplace you want to be a landlord if you can help it. Also, the house is so large (2400 sf)  that I'd have 15 people living in there within a month. 

@Anthony Dooley  "High-end finishes" - only if you consider drywall a "high-end finish". lol... :-)  It just needed a lot of work. All new insulation, electrical, plumbing, drywall, new water heater, pump, burner, etc. etc. etc. It's a great house - but I haven't even GOTTEN to the "finishes" yet. I am really sensitive to the economic environment up here and being careful not to over build. No granite countertops, for instance - they will be nice IKEA counters. No rain showers - basic fixtures only. As I said, it might be best just to get it on the market as a land-contract (people up here are ALWAYS looking for those)...and move on!

Sadly, it won't help my credit since there is no mortgage on it - and it doesn't even appear on my credit report.

Thanks for all the good thoughts and ideas! They are deeply appreciated!