Owner, Broker, Wholesaler w/ a hard money partner - what?

Question

hey BP community,so i found this 3/1.5 property in a pretty liquid market in north texas (denton) for $140k and i saw that there were mulitple options to acquire it. lease option, seller financing, or all cash. pretty eager to work with anyone, which already makes me feel a little uneasy (even though i'm going to need something like this to get started haha).after a brief first contact with the broker, i found out that it would be 10% down. Very intrigued now, i call the owner and ask more. He's got a portfolio of these and he doesn't have the time to talk, so i can't get much out of him (even after offering to call back later). from what i gathered it seemed i would be using THEIR hard money for the remaining $126k at 10.9-12.9% (tbd after i am screened) and then i'd have to refinance out. it needs repairs too, and he said that it would just be added on to the cost of purchase, seemingly no room for negotiations. he gave me the entry code to the property without any hesitation as well, which seemed like another flag. idk if thats normal or not though, i'm a newb! the whole thing kind of feels like a scheme, but if i did refi into a conventional 30yr mortgage on it, it would work great. He wouldn't really sit down and talk through the numbers with me either, but he said i should call back when he's less busy.i ran into another company in DFW recently that does this as well (networth realty). A broker, who is wholesaling, and partnering with a hardmoney lender that usually costs 14/4, and then offering to sell those properties for the investors he sold them too. sounds like a legal nightmare, and this offer in denton seems to be the same situation. has anyone worked with these types of companies before? i have no problem working with a wholesaler, but when everyone except me is on the same team, i get a bit skeptical. haha. i want to act fast, because i know i could househack this and live for free the majority of my months there, but i also want to be 100% sure i can refinance, or ideally avoid getting a hardmoney loan at 10.9%. any thoughts would be much appreciated! all the best, dan

John Leavelle · Answer

@Daniel Porter

Yes, you can speak with a Refinance Lender prior to purchasing the property. In fact that's exactly what I do with my BRRRR properties. The key is you need to determine the current Fair Market Value for the property based on recently sold comps. Do not take the word of the Seller or his Broker. You must determine the Value yourself (recommend using your own Realtor to help).

Once you establish the FMV you can compare it to the asking price. Have the property inspected to determine the condition of the major components and appliances to identify what needs to be repaired/replaced and what can be deferred. Get bids to establish a Rehab budget. Use it to negotiate the asking price.

If the asking price is close to FMV then this is not a workable deal for you. Considering you are using a Hard Money loan and need to Refinance out of it later. As @Andy W. stated the Refinance loan will typically be 75% LTV. If your HML is $126K to $140K (with Rehab costs) then the the new appraised FMV would need to be somewhere between $169K to $187K.

I would be extremely cautious with this deal. To me it's a no deal.

Daniel Porter · Answer

@John Leavelle really appreciate this insight. I'll be include cost of repairs in my final offer, if its worth doing. i know for sure the FMV is not that high. I think he's appraising strictly off of his rent estimates which are a bit steep, considering the neighborhood average is 3/2 and it's a 3/1.5. in a per-room college town that shower makes a huge difference!

Daniel Porter · Answer

@John Leavelle yes, i'd be renting out other rooms. Denton is a big college town and you can rent rooms for about $500~/mo. i only know this because i was doing it for about 4 years straight up until 2014! haha. i'm in my twenties and also a musician, so community living is pretty common in my subculture. not my fav, for sure, but its a modest price to pay for beginning my investment career now.

The reason for hardmoney is because the seller will only allow financing with the brokerage's partner lender (as i understand his terms so far). this is what triggered a bit of a gut reaction that made me feel like the deal was off. I'd much rather use traditional lending, or at least it would seem safer to me.

@Andy Webb is there a way to contact a refi lender to get a quote on what a refi would look like BEFORE i actually acquired the property? im under the impression you actually had to have the property to be able to sit down and project numbers.

my plan would be to add value by updating the kitchen, putting in laminate flooring (it looks like concrete), and other cosmetic stuff. possibly turn the 1.5 bath into a 2.0. haven't gotten to walk the prop yet, so idk if that will be an option. i really don't have a solid estimate on the repairs, i'm still learning how to estimate those numbers well. that's one of the most frustrating things for me honestly! any pointers or recommendations? I'm reading through J. Scott's book now...

also, is there a way to find the last appraisal value?

John Leavelle · Answer

Howdy @Daniel Porter

We need to back up a little. You kind of flew by an important issue. "I want to act fast, because I know I could House Hack this and live for free ....". If this is a Single Family Residence (SFR) you cannot House Hack and live for free unless you will be renting out the other bedrooms. The House Hack strategy is typically used in multi family properties where you live in one unit and rent the other (s) out to tenants. They inturn would be paying your mortgage for you. In a SFR "You" are paying the mortgage. So how would you be living for free?

Additionally, most investors don't use a Hard Money loan with a House Hack strategy. They're using a FHA loan taking advantage of the low down payment requirement (3.5%) and low interest rates. You plan is very expensive.

If House Hacking is a primary goal you better rethink this deal.

Andy Webb · Answer

Talk with your refi lender - I suspect you will have an issue at refi, depending on the ARV. If the value is around $140k and this is a rental, typically your refi loan will be at 75% of appraisal. If your hard-money loan is 90% or $126, you will not have enough from the refi loan to cover the hard-money loan and will need to bring cash to the table. Perhaps the repairs will push up the value and bridge that gap? How much are the repairs? What value are you putting on the property after repaired?

Another question for the seller: what other fees are there? Typically the hard-money guys will charge some sort of origination points, underwriting/processing, etc and I would not be surprised if that is the case here.

Giving the entry code is not uncommon...

Andy

Another question for the seller: what other fees are there? Typically the hard-money guys will charge some sort of origination points, underwriting/processing, etc and I would not be surprised if that is the case here.

Giving the entry code is not uncommon...

Andy

Daniel Porter · Answer

@Jim Thorpe that's the thing though, they would require i used their hard money lender instead of my own lender. 10.9 is better than 14%, but still, that's nothing on a 3.9% 30yr fixed!

Jim Thorpe · Answer

Yes, I have done a couple of deals like that and everything worked out OK. I would recommend seeking out you own hard money lender as well.

Owner, Broker, Wholesaler w/ a hard money partner - what?

Owner, Broker, Wholesaler w/ a hard money partner - what?

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