Out-of-state auction buy with big rehab. Hard way anyone?
Learning the hard way...
I decided a while ago to get into real estate as an investment vehicle to better provide for my growing family. For over a year I’ve been studying and searching the listings.
Being blind and nearly deaf make house hunting among other things a bit of a challenge. The strategy I read about that made the most sense for us was the Buy, Rehab, Rent, Refi, and repeat (BRRRR) method. Essentially, If you can find and rehab a place for 70% of the ARV, you can refinance it and redeploy your seed money over and over again. However, my wife and I would need some help.
The choice was to look in the Akron, OH area where my mother and her boyfriend, a general contractor, life. It’s my hometown and I know it well. Plus, I have family to help with the renovation and management.
The hunt was on! Still, competition was fierce. The only properties that seemed to be on the MLS seemed to be Class C/D small multifamily places in rougher neighborhoods that I'd rather not send my mom into or 150 year old colonials in Class A neighborhoods that needed a ton of work and were still over priced. After weeks of searching and finding nothing, I was getting pretty discouraged. Until I found this one house up for auction. I noticed it before in an earlier auction. Its ARV was estimated to be around $165,000 but the bidding had ended having not reached the reserve price. So, it was up again.
The market rents in the area were between $1250-1450. I figured that if I could keep the total project price under $115,00 (70% ARV), I was golden. I put in a bid for $64,800 and won! This meant that I had a $50k margin to work with. No problem.
Yeh, right! My first thought was, “Sweet, we won!” Then it was, “Whoa, we won. Now what?”
my mom drove over to the property to do some snooping as I began the contract execution process. The place was vacant and unlocked, and she let herself right in.
“Oh, Honey...” Never a good start. “This place is going to need a lot of work!”
“How much?!?”
“About $81,000. Everything needs to be replaced; the windows, HVAC, water tank, roof...”
All of the sudden my new adventure turned into something else. In the meantime, I was looking to hard money lenders which were the only way I could find thus far to help with the purchase and renovation on an all cash purchase. The title company was moving quickly and I'd signed the purchase agreement with me as the buyer, not a LLC. I'd heard that banks don't like to lend to LLCs without a history of revenue. The plan was to transfer the title over after refinancing. There's a risk of triggering the banks Due-On-Sale clause by doing this, but I've also read that this is very rare if the loan is till being paid on time.
What I didn’t realize is that HMLs most often only want to lend to LLCs! Catch 22? This isn’t true in all cases but it was too late. The seller and the title company were waiting on me to wire the money to the escrow account and I sidn’t want to lose our earnest money or this house because of delays.
So, here we are. We closed Thursday. HMLs don’t do just home improvement loans. They want to be in on the purchase. Most banks don’t want to touch a non owner occupied property belonging to an out-of-state owner. We have about $30,000 in reserve cash earmarked for this project and could pull from less liquid investments, but I’m still looking for alternative ways to leverage even a little portion of this project to get us across the refi finish line.
I tell you what... I’m learning all those things they leave out of the real estate books very quickly! If anyone has any suggestions, I’m all ear. ...That was a little joke. The other ear doesn’t work. Get it? Oh, never mind. Thanks for any advice you can offer.