Does a rehab loan make a flip not worth it?

Question

A sibling and I are interested in dipping our toe into flipping. We looked at a few properties and found one that we like. It's a homepath property and we can't get a straight answer on whether it will qualify for conventional financing without a rehab loan. How do we figure that out?

It looks like the roof might have a leak or may have been leaking at some point. There is minor drywall damage. We assume it needs a new roof.

Our realtor also found a septic inspection report from earlier this year that says the septic was showing signs of malfunctioning. It says there are some indications of a leaking tank.

One of the rooms is missing some flooring and someone ripped out a wall and there is drywall missing in that space and a plug and light switch hanging from the ceiling. In the back of the house the paint is peeling a bit and a few boards need replacing.

The house could be worth anywhere from $200k-300k and it's listed for $120.  We can put 20% down and pay cash for the repairs, except maybe the septic. We would also offer less than $120. Unfortunately we can't pay for the house and repairs in cash so we would need some kind of financing. An alternative option is that my sibling lives in the house after we have fixed it up, or we rent it out.

When you get a rehab loan how do they determine what they want you to fix? Since with a rehab you have to pay contractors to do everything, does that usually make it not worth it to buy?

Account Closed · Answer

1. FHA 203K rehab loan, loans purchase and rehab. Lots of red tape, low down payment. Lower rates and long term, has PMI which can be high and you are usually stuck for 6-12 months, unless you can refi after 6 to traditional loan with no PMI

2. Seems you have good equity and so a hard money rehab loan would work. Look for a lender that will do whats called ARV [After Repaired Value]. Most of the time they will lend you fix up money along with it with 10% down. 4 points and 10-12% usually but you should have enough equity to be good. Same fix and refi in 6 months

Nghi Le · Answer

This is really dependent on the HML.  Most HMLs don't care who you hire for the rehab (and will even allow you to do the work yourself) unless the work is significant (like structural, foundation, etc).  Most HMLs also prefer that you borrow rehab funds from them as well.

This is coming from my experience of having borrowed from 20+ HMLs and talking to 100+ other ones.

Brian Powell · Answer

While the property might not qualify for a traditional conventional loan you do have the ability to do a conventional renovation loan that would help with financing the costs of your renovation.  I've helped many investors with them and it is a good tool if you buy right and have a good contractor to work with.

Nancy Zhao · Answer

If your hard money loan is only on purchase price and you don't take any rehab funds, the lender will not care who you hire to do the rehab work.

Darron Washington · Answer

@Charissa B. Welcome from your description i suggest getting an up to date inspection report to pinpoint exactly what needs to be done and during that time bring in your "contractor" to come by give you an estimate (free) this way you have at least a pretty close estimate on rehab costs giving you a better chance to calculate the numbers accurately. A source of money investors use besides the bank is a hard money loan to finance the rehab they will require you fix all problems in the inspection report. I suggest running your numbers again with the calculators provided here also to give you a visual. Good luck hit it big!