All Forum Posts by: Tom S.

@Jonah Slove As mentioned above, assuming zoning allows it, do you have water / sewer / septic for these 6 cabins?  I own property in VT and looked at a similar project in the past.  In particular if septic systems, VT was pretty strict on the locations so do your research for your state.

I personally couldn't find too many construction lenders and it would be easier to use a HELOC from a different property to get started, so keep that in mind as a possibly.

Sounds like a cool concept and good luck!

@Eduardo Cambil  Yes, I've done a few deals like this as a buyer.  Bought with seller financing first and then refinanced with a bank.

Quite a few questions you posted and I can't answer them all, but will summarize quickly:

- Yes, it's a solid strategy. I didn't check on the 6-12 month seasoning requirement because I would use at least a year fixing up the property some, raising the rents, and ideally forcing an increase in appreciation.  That way you don't have to worry as much about bringing money to the table for the refinance.

- Try to have a good 5 or 7 year balloon as the minimum for the seller finance (SF), and an option to extend for a fee, in case the lending environment suddenly changes, it gives you more of a buffer.  Most SF deals I came across were 30 year amortization with a 5 year balloon.  

- The biggest downside is you're paying two set of closing costs.  

- I quickly learned it was easier to go to that same bank in advance and ask for purchase + rehab financing all in one loan, one set of closing costs and it takes any the stress of worrying about the refinance.  This eliminates the need for the seller financing in the first place.  Most SF places needed work, and getting the purchase + rehab loan with a bank was much easier (check with local banks or credit unions, ask for the business or commercial loan department).

- Typical lending was 75% of ARV and the loan converted into a normal mortgage after the rehab work was complete. The bank would do the appraisal in advance so you know how much the loan will be. For me, it could be closed in my personal name or an LLC.

Hope that helps and good luck!

@Eduardo Cambil  Check with local banks or credit unions.  Yes, the closing costs will still be high and expect 20%+ down because it's an investment property.

Seller financing may be a option if you hunt around enough.  I've bought a few deals at 10% down which for a $50k property, would only be $5k down and $1k-2k in closing costs.

If you own other properties, a HELOC would be your least expensive option.

Good luck!

@Devin James  I'm straying from the question slightly, but personally if I was able to raise those funds, I would use it as a downpayment and get a loan for the rest.  In the end, the net profit to myself would be higher using a loan versus giving up an equity split, and less complicated.

@Marcos De la Cruz  Echoing what other have said, both pros and cons.  I added 2 section 8 units to my rental mix over the past 2 years and in general, no issues.  Rent is paid on time, and no problems with the general inspections at the beginning.  One unit passed immediately, the other unit they asked me to professionally clean the carpets.

Slow on the paperwork side, but for both tenants, I can see them staying for many years.

Depending on the state, they may have a one time incentive bonus to sign up.  Mine (in VT) was $1,000.

Hope that helps and good luck!

@Fara Heath  Just curious, how did this deal work out?

@Jorge Liang I believe in CA the LLC fee is $800 annually, so factor that in too.

I would say if those are the true numbers, the place would have sold instantly already.

Purchase of $179k and rehab of $150k to get a value of $735k is almost unheard of.

Main red flag is that something else major is wrong with the property.  

I've done a number of seller financed deals as a buyer.  In response to your questions:

Biggest q i still dont really understand is:

- what happens if i refinance before 7yr term or sell

As you'll be the owner, you can refi or sell before the 7 years.  There may or may not be a pre-pay penalty, obviously I would negotiate for no pre-pay.

- at year 7, can i extend balloon or not

No, unless it's in the contract or the seller agrees to it.  You can put in language for an extension for a certain payment amount.  Gives you more options.

- at year 7 if value appreciated a lot, can i do a HELOC on it and use that HELOC to pay off the balloon - probably not due to lien being secondary etc on heloc

Yes on the HELOC, but it would probably be easier just to refi and pay off the seller, and cash out more money too.

Hope that helps and good luck!

@Jesse Simmons  I did a similar deal as this in the past.  It was a learning experience but I made it work in the end.

Mine was a 5 unit commercial building that needed a gut renovation, similar to yours.  It was on the market for a long time because it didn't qualify for conventional financing will it being unlivable.  The seller offered financing with 20% down, which I used to buy the place.

After starting construction and realizing it was going to cost more than expected, I approached a small local bank that knew the property and would offer the rehab financing.  However, I had to subordinate the sellers note to 2nd position (hint: set up that language in advance to streamline the process, if that's the direction you're going to go).

Since the ARV was high enough, and the potential income would support the mortgage and expenses, it all worked out. The advantage with the bank was minimal closing costs, a good interest rate, and a draw system so I could get funding as I completed each rental unit. Required good credit, adequate reserves, full doc commercial loan with a personal guarantee.

Hope that helps and good luck!