Using a "repair escrow" to pay for rehab?

Question

Right now I'm looking at a MONSTER of a deal that I need to move rapidly on, I need to know the general concensus on my idea... I'm sure its used in other places, I've seen it in HUD deals and I think someone used it on one of those Flip shows...

"as-is" appraisal..........    130K
                    Seller WILL accept......    100K
                    ARV................               160K-175K
                    
                    Now, What im thinking is rescinding the 100K offer and offering 120K, with a "repair escrow" from buyer of 20K... which will be used to, well, repair it :) 
                    
                    The reasoning behind this is to obtain conventional financing without paying exhorbant interest on a hard money repair loan. 
                    I was thinking about the 203K loan too, anyone ever used one?
                    What stipulations are on conventional loan doc's that might stop this from happening?
          Ok... not so much of a MONSTER deal, but could definitley catapult my cash reserve.

Richard Warren · Answer

More on the program: http://www.hud.gov/offices/hsg/sfh/203k/faqs203k.cfm

:cool:

Will Barnard · Answer

Dustin,

Your creative thoughts are on teh right track, just keep in mind that soem lenders will only allow so much to be given from seller to buyer. $20k is 20% more which may not happen with conventional financing.

One other note. $100k acquisition + $20k in repairs is a total of $120k which is 75% of the ARV. You should be at 70% so your price is a bit high, which lowers your return on investment. (something to keep in mind)

Bill Gulley · Answer

Dustin, very good thinking! You want to make you disbursements at 80% on draws so that 20% always remains for final inspection. You contrcat will not be an easy one. You should select the contractor or approve them. If you use your people, say so. When you close there will be a construction management disbursement fee so factor that into the deal, check with the lender or title company. 203 is a good way to go, especially if the property is in an economic development area, not that it is required, but helps in the deal, it's benny points for the lender. Good Plan! Bill