Triplex under contract did not appraise looking for options/input

22 Replies

I have a triplex under contract that needs a lot of renovation, about $90k. The lender basically says I need to have these renovations done before I can get a loan based on the appraisal. 

The way I see it is I have a couple of options at this point.

1. Have the seller do the renovations with their own capital and raise the sale price. I don't think the seller will be up for it and probably does not have the cash.

2. Put money into escrow and have the seller do the repairs with my capital. This option seems risky to me since I will not have title.

3. Escrow hold-back. Have the lender do an escrow hold-back. This option would be ideal but I don't think the lender will be able to do such a large hold-back.

4. Some sort of seller financing. The issue here is the seller still holds a mortgage on the property. I guess I could be a second position on the property but I still feel like I have a lot of exposure in this situation. 

5. Go hard money to do the renovations and then cash out refi. Probably my fastest but most costly option. To that note any hard money lender recommendations would be appreciated.

Any comments or inputs are welcome and appreciated. I am basically just looking for some input from other who have been in a similar situation.

Thanks!

Jake

I asked the lender about a rehab loan and she said I need to have at least $100k in rehab to qualify.

That being said I think she was looking at the bank's portfolio products not FHA products. I will certainly research this option more.

Thanks for the tip!

@Jacob Szeto - @Ryan Murdock has a good approach with using a 203k reno loan. If you roll it into one, your loan will be a little higher but at least you 1) have the property and 2) have the money to do the renovation.

The second option that most would suggest is a hard money lend with a refinance at the end - just be ready to put some work in!

Third option: if the seller is short on money like you believe, you could always attempt to use the appraisal to negotiate a lower price.

@Jacob Szeto - it was worth checking into haha. Anything to bring a price down (as long as you're buying) is worth looking into, right?

The least risky option would be a reno loan rolled into the purchase. If the minimum is $100k and you're estimating $90k, you could add in $10k to your estimate as overhead or put that extra money to use somewhere else. It'll take $40 (I'm estimating) per month out of your cash flow, so you'll have to see if that's worth it

@Ben Wilkins Haha I already beat the seller up on the price pretty good. Went from 300k to 260k. 

As for just adding another $10k to the rehab budget, it is an option. It just doesn't sit right that I am required to spend $100k. What happens if I come in under budget or find a few ways to save money? I guess if the deal still makes sense I will just have to find a way to be alright with it.

@Jacob Szeto depending on your time table, you could look into a different lender.

Use the extra $10k by renovating the kitchen and bathrooms, then increase rent by an extra $50 per month

Or use it to split the utilities (if possible). 

Find a way to use that $10k to bring rent up - I'm sure you could be creative haha

I understand the difficulty justifying taking out more money than you require, so you're correct that it'll come down to whether the deal still makes sense.

$90k reno for a triplex is a lot of money.  Before you go that far, I would ask myself these questions. 

1_Does the rental income after reno sustain the mortgage and expenses yet generates decent cash flow, say >8% COC?

2_Is the triplex located in a good neighborhood say B class which generates decent cap gain ( although I would never recommend speculation)

Are the items on the "subject to" the full 90k amount or is it a smaller list? If it is less items that might open the escrow items. If it is close to that 90k you should look into rehab loan the 100k does sound like some kind of portfolio option not FHA or FNMA. Also are you owner occupying this property? As your rehab loans are out if it is multi and investment.

@Bill Walton No the full 90K is not comprised of the "subject to" The lender is attempting to get the escrow hold-back for a smaller amount but isn't hopeful. I am owner occupying so I at least pass that criteria. I will be looking into the 203k rehab today and keep you guys updated.

@Kelvin Lee Hi Kelvin, excellent points. I have done my analysis and research. With 20% down and rehab costs out of pocket my COC is 10%. The cap gain is about $200k including the capital investment of $90k, with an net of $110.

It is a class B neighborhood. Mostly an older working class suburb of Portland, OR. Appreciation last year was about 12% and I believe the neighborhood will continue to follow the general trend of Portland. While the appreciation/speculation would be great icing on the cake this deal works without it.

$90k rehab does sound like a lot for the area but I have it under contract for $87k a door which leaves me plenty of room for rehab.

You could do a lease option on the property. 

You basically rent the property from the owner and buy and option to buy at a certain price in the future. 

go over the contract with someone so it has everything you need but this would give you control of the property then once it is rehabbed you could buy it with the appraisal.

@Jacob Szeto how much experience do you have on renovation? You are at $260k what was the appraisal amount, and what is the after repair appraisal amount? Are the units vacant? are the renovations needed to consider habitable is that what is required? 

How much is it to get the list of items done to get repairs for it to be good for lender?

Where is the project located?  

@Derrick Aragon I do not have much experience doing renovations outside of my construction experience many years ago. My brother does have a lot of experience and he will be my sounding board/second pair of eyes. The appraisal did not include an ARV. My ARV is based on NOI with a cap rate of 5.5 and a sanity check on price per door.

All units are vacant. One unit is rent ready, the other two need some updates including floors, kitchens and bathrooms.

Some repairs are needed to be considered habitable including, electric in the attached shop that needs to be brought to code $7k, foundation repairs $12k, and possible plumbing repairs which the inspector saw no issue with but the appraiser wrote in as a "subject to" inspection.

The lender is still trying to get an escrow hold-back but as I have stated before I am not holding onto any hope that they will go for it.

The property address is 14601 SE Arista Dr Milwaukie OR for the curious. I also have a pro forma if anyone is interested, I am always looking for deal feedback as well as analysis review.

The seller is in a rush and only granted a one week extension til July 18th. I may be able to convince him to give me more time, if he does I might pursue putting money into escrow and having the repairs done or just getting a 203K rehab loan.

I am also actively pursuing hard money so any recommendations would be appreciated. 

@Jacob Szeto I think you mentioned something about if you do a minimum of 100k you can get a rehab loan? Do that, you will need the extra money.  Depending if you have to do your roof and how much swinging of a hammer you are going to do you are light at 90K.

Second choice owner carry until you can rehab. 

third option whole sell the property. 

if you don't have your loan lined up especially the 203K rehab loan and only have a week extension , your not going to close in time.