Help with being creative with a deal?

16 Replies

Hi BP!

So I need some help or advice with a deal. My in laws are renting a house that they used to own 20 years ago. My father in law built the house and hit some hard financial times years ago with his plumbing business when the market went south. The person who bought the house from them became a good family friend and has charged my in laws a well below market rent all these years. He now wants to sell the property and I was able to negotiate with him to sell it to us. He is giving us a tremendous deal and opportunity. I’m saying we since I will have to be a part of the deal to help my in laws get the house back. So here’s the deal in a nutshell.

Agreed Sale Price- $750,000 ( we will be giving the seller $100K cash to sweeten the deal for him for tax purposes. So on paper the sale Price will be $650,000. 

I ran comps and in its current condition the house would easily appraise for $900,000-$950,000. With $75,000-$100K worth of work the house could easily sell for $1,200,000 plus.

This house is in a very desirable part of Glendale Ca.

The problem is the seller would like the deal done quick. I was thinking of trying to get a short term Hard Money loan that would cover the purchase and rehab. By doing this we pay off the current owner plus add value and then have the property refinanced into a 30 year fixed. I'm conservatively thinking post rehab we would have $350,000 plus of equity. The problem is that I only have experience doing 1 Flip so I'm not a desirable client to a Hard Money lender that would possibly lend at an ARV.

I’ve been wrapping my head around this trying to figure out how I can make it work. My father in law doesn’t have a lot of W2 income that’s why I and possibly 1 other person may need to be on the loan.

Any suggestions or advice would be greatly appreciated. 

Thanks in advance....hopefully I explained it clearly.

Your immediate problem might be missing numbers, and missing observation regarding the HML potential.

Bigger Problem:

AP = $750k ($650k balance after $100k cash)
Rehab = $100k
Total HML needed = $750k

Potential ARV = $1.2M
70% ARV (HML could be less) = $840k
Money left for HML fees & Overruns = $90k (and other misc. costs)

Don't give the seller $100k

Solution: Simple. Leave the current seller in place...temporarily.

1 - Don't buy the property from the seller straight up...buy it as a Land Contract.  Term equals 1.5 times the estimated rehab time.

2 - DON'T give the seller $100k towards LC in Cash, give it to the Seller in the form of that $100k in rehab that's needed

3 - Make sure the LC states the agreed price is the same $750k with NO Payments for <fill in number of months here>

4 - Payments are made on the LC using the rent money.

5 - When the rehab is completed, you have a $1.2M property, and execute the LC based on that.

@Danny Cerecedes , it doesn't make sense to me that you would want it recorded anywhere that it's only valued at $650k as of now. (eg. Will you tell your buyers that you had to put $400k worth of work into it after purchase? ie. Will your "creativity" ever stop?)

[Have you a similar greasy explanation to offer the IRS as to what happened to $100k that'll mysteriously disappear from your account? Conversely, will the Seller?]

I don't know how business is legitimately conducted around there, but...

Brent thanks for the reply. My father in law has a small piece of property that is paid off and he is going to pull money out on it to pay the seller the $100K.

We are getting the house for $650,000. The seller knows it’s worth much more but he wants my in laws to have the house thus the sales price. To me it’s better to get it at that price then the true value it it we’re to hit the market (probably $900K plus). There would be instant equity in the property at a purchase price of $650,000. The reason for me thinking Hard Money is because the seller wants a quick close because of his current situation otherwise he will try and find a cash buyer.

Not trying to do anything shady and business is conducted legitimately. I’m just trying to get the deal done with the current seller and then we can worry about getting proper financing on it.

Hopefully that makes more sense. Don’t think I explained well.

Originally posted by @Joe Villeneuve :

Your immediate problem might be missing numbers, and missing observation regarding the HML potential.

Bigger Problem:

AP = $750k ($650k balance after $100k cash)
Rehab = $100k
Total HML needed = $750k

Potential ARV = $1.2M
70% ARV (HML could be less) = $840k
Money left for HML fees & Overruns = $90k (and other misc. costs)

Don't give the seller $100k

Solution: Simple. Leave the current seller in place...temporarily.

1 - Don't buy the property from the seller straight up...buy it as a Land Contract.  Term equals 1.5 times the estimated rehab time.

2 - DON'T give the seller $100k towards LC in Cash, give it to the Seller in the form of that $100k in rehab that's needed

3 - Make sure the LC states the agreed price is the same $750k with NO Payments for <fill in number of months here>

4 - Payments are made on the LC using the rent money.

5 - When the rehab is completed, you have a $1.2M property, and execute the LC based on that.

Joe thanks for responding. So I’m not to familiar with a land contract but seems like an option. 

What intrigued the seller to sell to us was his relationship with my in laws and the idea of getting $100K cash. The property right now would appraise in the neighborhood of $900-950K. My father in law has a small piece of property that is paid off that he will be pulling $100K out of to give to the seller. The seller wants to close the deal quick because of his current situation. If he were to list this on MLS he would have multiple offers the next day...there is no way would could compete with that.

Part of me also thinks to try and just go after traditional funding probably an FHA loan just to get the deal done. The house needs work but it would have no problem passing the FHA requirements. I just need to make sure the seller is willing to wait for an FHA loan to fund.

Originally posted by @Danny Cerecedes :

Brent thanks for the reply. My father in law has a small piece of property that is paid off and he is going to pull money out on it to pay the seller the $100K.

We are getting the house for $650,000. The seller knows it’s worth much more but he wants my in laws to have the house thus the sales price. To me it’s better to get it at that price then the true value it it we’re to hit the market (probably $900K plus). There would be instant equity in the property at a purchase price of $650,000. The reason for me thinking Hard Money is because the seller wants a quick close because of his current situation otherwise he will try and find a cash buyer.

Not trying to do anything shady and business is conducted legitimately. I’m just trying to get the deal done with the current seller and then we can worry about getting proper financing on it.

Hopefully that makes more sense. Don’t think I explained well.

You just wrote: "We are getting the house for $650,000", but, in your original post, you added: (also?) "we will be giving the seller $100K cash to sweeten the deal for him dot dot dot, dot dot dot. So on paper the sale Price will be $650,000"!

Which is it?... 

The purchase price on the contract will be $650,000. The $100K is going to be given to the seller outside of escrow. Just looking for some suggestions Brent. Sorry if I’m confusing you thought I was pretty clear.

$100K is money being pooled from family and money my father in law is gonna pull from a small house he owns.

Contract will be written at $650,000

So the house costs $750...and the contract reads $65k...but you are giving $100k in cash to the seller to "sweeten the deal"...but if the $100k is part of the "deal", you're paying $750k for the house.

@Danny Cerecedes I like you're thinking, and as an investor/lender myself, I would pursue a similar idea. There are a few items you'll need to button up to ensure this plan works according to what you've discussed. Here's my take on what's left to accomplish:

1) A HML will take into consideration experience, credit, and cash to the deal. Although you have limited experience, there are lenders that will consider this opportunity - just expect to pay a bit higher interest rate (i.e. 8-12% interest only payments). This is your best bet to land the deal at the sellers urgent request.

2) You'll want to ensure you can get qualified on the back end from a traditional source of funding to pay off the HML. Because of the price after repairs, you'll be past FHA lending limits in LA, and flirting in Jumbo Loan territory. Usually you can refinance up to 80% but since it's a larger loan, the underwriting process is a bit more stringent.

All in all, it's possible to make this happen, just consider the 2 items of importance before you move forward.

Hey Eric,

Thanks for the info. So I spoke with a lender that I typically have my clients use for traditionally financing. He has some hard money lenders that maybe able to finance this deal. The part that is frustrating so far is they say find the deal first and the money will follow. This house has $300K plus of equity already but the best Hard Money lender can do is fund 85% of the total cost which means we would have to come in with 15% which is approximately $98,000 not including closing cost. We are pooling money together to pay the seller the $100K cash and we would have to come up with another $98,000 plus for the Hard money loan. There has to be another  way with so much equity in the property to not have to come up with so much cash up front or is there not?

How do people finance using none of their own money?




 Originally posted by @Eric Loya :

@Danny Cerecedes I like you're thinking, and as an investor/lender myself, I would pursue a similar idea. There are a few items you'll need to button up to ensure this plan works according to what you've discussed. Here's my take on what's left to accomplish:

1) A HML will take into consideration experience, credit, and cash to the deal. Although you have limited experience, there are lenders that will consider this opportunity - just expect to pay a bit higher interest rate (i.e. 8-12% interest only payments). This is your best bet to land the deal at the sellers urgent request.

2) You'll want to ensure you can get qualified on the back end from a traditional source of funding to pay off the HML. Because of the price after repairs, you'll be past FHA lending limits in LA, and flirting in Jumbo Loan territory. Usually you can refinance up to 80% but since it's a larger loan, the underwriting process is a bit more stringent.

All in all, it's possible to make this happen, just consider the 2 items of importance before you move forward.

@Danny Cerecedes This is where a partnership with a private money source would come in. In a sense, the private money source would act as your partner or take the 2nd lien position on the deal, funding the difference required by a HML. You can meet these people at real estate investor meetings, or real estate education seminars.

When I started flipping, I actually partnered with my private lenders and offered a % split on profits upon sale. There's other ways to structure the deal, but hopefully it gives you an idea of how it can be done.

Originally posted by @Danny Cerecedes :

The purchase price on the contract will be $650,000. The $100K is going to be given to the seller outside of escrow. Just looking for some suggestions Brent. Sorry if I’m confusing you thought I was pretty clear.

$100K is money being pooled from family and money my father in law is gonna pull from a small house he owns.

Contract will be written at $650,000

Apparently you weren't so clear, if @Joe Villeneuve just made the same point as I was trying to!

So I'll repeat my question: $650k, or $750k - which is it? 

Hey There Brent!

Not sure what you motive is for the abrasive post but If my post bothers you than just don’t reply to it. This site is about helping each other out and being positive and you aren’t doing either. 

Dont bother replying to any of my future post. There have been plenty of people that have been very helpful and thanks to all of you!!

Originally posted by @Brent Coombs :
Originally posted by @Danny Cerecedes:

The purchase price on the contract will be $650,000. The $100K is going to be given to the seller outside of escrow. Just looking for some suggestions Brent. Sorry if I’m confusing you thought I was pretty clear.

$100K is money being pooled from family and money my father in law is gonna pull from a small house he owns.

Contract will be written at $650,000

Apparently you weren't so clear, if @Joe Villeneuve just made the same point as I was trying to!

So I'll repeat my question: $650k, or $750k - which is it? 

Yes Joe ultimately we are paying $750,000 for the house sorry for the confusion. We only need Hard Money for a $650,000 purchase. Our family is pooling the $100K to give to the seller outside of escrow. We need a Hard Money loan to close the deal fast and then we will refinance into a conventional loan....atleast that is my idea.

Originally posted by @Joe Villeneuve :

So the house costs $750...and the contract reads $65k...but you are giving $100k in cash to the seller to "sweeten the deal"...but if the $100k is part of the "deal", you're paying $750k for the house.

OK then.  Let me also ask this question for @Brent Coombs , since I think he's as confused as I am...and let me add that he was trying to help...as we all are.

Let's put yourself in the lender's position.  If I was the bank, and I was trying to write a loan, this is what I see:

1 - Purchase = $650k

2 - Your skin in the game = 0

3 - The Loan I'm giving to you = 0 (See #2)

@danny

Hey I have a same situation as you. The only difference is that I wasn't try to use HML to fund the entire project but honestly HML is the most expensive funding out there but it get the job done when needed and can close usually 7-14 days.

I purchase my home for $510k. I paid seller out of escrow $60k which leave the purchase price on contract at $450k then I down an additional 30% on the 450k which around 135k...I don't know why I did it at the time I could have just done the 30% on the $510k as HML guidelines. I wasn't thinking n let me loan guy talk me into it.

I wanted the house n also bc I wasn't able to do prove of income so HML was the only way I could go. Normally I won't recommend u going with HML but is a great option to have.

My HML charge me 3.5% up front cost and at 9.5% interest only for 2 yrs. not the best way to go n very costly

Pass forward 2yr later I was able to refinance to a conventional 30fixed at 5.75%..

It work out for the best but if I have other choices I will not go with HML bc is costly n u have to do the loan twice.

Hope it work out for u but u should exhaust all your option before going with HML.

Thanks Tom that is biker helpful. We are trying to see if we can do an FHA loan on the house too which may work. I was thinking HM just because the seller wants the deal done ASAP but if he's ok with waiting we may try to go the FHA route.

Appreciate your advice! Glad your house worked out!

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