Can I get a loan strictly for rehab cost?

Question

Hello BP and thanks in advance for any help you can provide.

I may have the opportunity to take control of a SFR property in Detroit using a lease agreement. The owner is highly motivated to not deal with the property; however, they still have a mortgage on the property. I am offering to take control of the property, pay for the rehab (approx. $10-15K to get rent ready) and I will cover taxes, insurance...the normal expenses. The owner will continue to solely pay the mortgage for the first 12 months, from 13-24th month I will pay 50% of mortgage. After 24 months I will either assume 100% of mortgage cost or have to exercise my option and purchase the property for remaining mortgage balance. Do lenders finance only the rehab cost of a property when their is still a lien on the property?

David Dachtera · Answer

@Lonniel Ingram,

Unless you hold title to the property you're undertaking a VERY risky project. You're talking about putting a BUNCH of money and effort into a property you don't own. You stand to lose your entire investment - you have NO protection at all.

Explore Charlie's suggestion first. Then, consider ...

You'll want to study up on a strategy called "Subject To": taking title to a property subject to the existing financing. The seller conveys title; however, the existing mortgage lien remains in place and in the seller's name. The onus is on YOU at that point to make the payments directly to the lender.

If you are not in a position to pay 100% of the current payment, explore a different strategy: "sandwich lease option" with you having the right to improve the property then sub-lease the property to a tenant you bring in.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Charlie Fitzgerald · Answer

The titled owner of he property would have to take out the loan.  You and that person could form a partnership, (speak to a RE Attorney to structure this properly please) add you to the title and take out a small loan in both of your names through the partnership, in 2nd position behind the 1st, using a private lender/hard money lender  in your area.  Or, as has been suggested, you could cash flow the rehab costs in some other manner.

Joe Ellis · Answer

@Lonniel Ingram

I third the Subject To idea. However, your concern about being responsible for the 1st loan shouldn't be an issue if you're looking to improve the property and put tenants in it and you know that you (aka your tenants) are able to pay the note. Unless you're worried about them not allowing you on the loan?

Lonniel Ingram · Answer

@jason hirko

@David Dachtera

I'm going to look into the sandwich lease option strategy. If I don't have to pay the mortgage upfront than I would rather not. I want to be able to control the property but limit my upfront costs and risk. I like the partnership strategy; however would that make me responsible for the 1st loan also if I'm placed on the title?

Thanks for your valued input.

Jason Hirko · Answer

Second the subject to idea. And on a project that risky, even If you were able to find hard money, it probably wouldn't be a much better rate than the AMEX in your pocket.

Lonniel Ingram · Answer

@charliefitzgerald thank you for the feedback. I appreciate you breaking it down for me. That's a really good idea. I see that you are in Nevada. Do you lend in Michigan? And for this type of deal?

Lonniel Ingram · Answer

@bill hamilton thanks for the feedback. So even though I have an interest in the property and I will be receiving the cash flow; because I don't own it outright it's not considered for collateral?

Bill Hamilton · Answer

The short answer is no. You don't own the property so you have no equity. You would probably have to go with using a credit card or other type of finance.

Can I get a loan strictly for rehab cost?

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