Real Estate Agent · RI · Member since 2020 · 73 posts · 86 votes
I'm looking into a SFH to either BRRRR or flip. (I know I'm putting the cart before the house with this question but I'm still running numbers and market info). The septic failed it's inspection and will need to be fully replaced, I received a quote for $30K which is accurate to the system needed and high water table area. The issue is engineering and permitting will take approximately 2 months and by then it will be winter. All companies have said Spring 2022 would be the estimated replacement date due to frozen ground (property is in Rhode Island). This would only be my second investment property (other one is a BRRRR that is still under renovation right now so my money is tied up in that.)
Question 1: Would this be a property you even looked at right now knowing that it won't be complete until next summer?
Question 2: A hard money loan does not seem feasible due to the length of time I'd have to hold the property. What do you think my best loan option would be to not incur too much interest/expenses? I'd like to wrap the full renovation cost ($110K) into the loan but I don't have to if that would make getting a loan harder.
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
4y
@Jamie Derasmo on question 1, in this market if you want to keep buying you kind of need to look at everything, at least everything that is a size of a project you're willing to take on (which it sounds like this one is).
On question 2, it really depends on how good of a deal you're getting, whether the numbers work to allow you to use hard money. If the property is in a condition that prohibits getting bank financing, then your only other real option is private/hard money. (I assume a 203K is out because it's an investment, not owner-occupied, property, but I don't have a lot of experience with that program TBH.)
If you're able to line up financing from family and friends at favorable rates, then that's more of a private money route which could make it more workable. Many people do this, for example, buy helping aunts/uncles/family friends with retirement accounts from previous jobs set up a self-directed IRA which can then loan on the project (though see handsoffmyira.com for an important and immanent legislative threat to this funding model).
I honestly feel like a lot of it does come down to the purchase price though. It sounds like a tough property/project that can't be sold with traditional bank financing, so honestly the seller needs to allow enough room in the purchase price to compensate the buyer for taking the project on. That may be heresy in today's market but I still stick by it.
Trying to think of other ideas, I'm not sure if this is an on-market property or not, but especially if it's not, there could be the possibility of paying the seller for an option to buy the property at a certain price within the next year, and letting the seller continue owning it through the winter, then you exercise your option and purchase it in the spring once the ground has thawed out.
That's a much easier concept to pitch to the owner if they don't have a real estate agent who's basically just motivated to sell it and get their commission ASAP, but if they've had a few deals fall through because of the failed septic then even if there's an agent, maybe they'd be open to it.
Alternatively, and maybe simpler than an option, would be just putting down a decent-sized earnest money deposit and having a closing date in the spring - basically an unusually long period for the closing. You could consider recording a memorandum of agreement but if you get that far (i.e., the seller is actually open to this) then you'd want to check with your attorney on that idea. I like it, and some attorneys might, but some might not as well. But if you get to that point it's a great discussion to have 😀
Real Estate Agent · RI · Member since 2020 · 73 posts · 86 votes
4y
Thanks Anthony, always appreciate your input! It is an on-market property that's been on for about 3 months. Unique idea about the extra long closing, though I'm not sure I'd be comfortable with that since I see all too often seller's get jumpy, even if a contract is in place, if they have too much time so that makes me a bit hesitant. It's an unoccupied residence so (I'm assuming) they want to off-load it quickly.
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
4y
I understand completely @Jamie Derasmo - that's why sometimes if it's an especially good deal or there's a long period until closing, I'll record a memorandum of agreement so that if they tried to sell it to someone else it would come up in the title and put a stop to that. However you have to remember to release it if the deal falls through or some reason. That's why I was saying it's a good thing to run by your attorney before doing it.
My thought with this deal is, if it were me, I'd offer the seller two options. Option 1 is normal closing time but a low price - low enough to compensate you for the extra 5-6 months of delay. Option 2 is a higher/better price but has the closing pushed out 5-6 months until the ground has already thawed.
If you're confident about your numbers then I think those are the two main choices. You might be afraid someone else will come along and offer to close now but also pay the higher price. But if your numbers are good then that just means they're willing to take a lot less (or no) profit for the risk and effort of the project. If that's the case, you'll just have to let it go - you don't want to race to the bottom and find yourself working for free or worse, paying for an expensive lesson in patience/negotiation.
There may be more creative solutions here as well. Such as, if there's no mortgage, have you considered making an offer which has the seller financing the deal? You can try for no interest at first (e.g., "360 monthly payments of 833.33") or if you must pay interest, negotiate a rate that will almost certainly be much better than you'd pay with hard money. With seller financing you can definitely get creative with the rate, down payment, even the timing of the first monthly payment (e.g., 360 monthly payments starting January 1, 2022).
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
4y
The goal would be to complete it in spring but really that depends on what other rehab you need.
One other option is short term seller financing, maybe a year. You would still need other financing for construction so it doesn't meet the goal of one loan. And while you do secure the deal you will have all the carrying costs until spring. You can rehab what you can before septic. The issue is the DEM is going to take however long it takes so timing is everything. It really depends on the price and the other work needed,