Just a day after starting a new hard money loan, my partner contacted me with another opportunity. This is another single family home, 1,900 square feet, 4 bedrooms, 2 baths. The outside looks nice:
But the inside needs about $30,000 of work. The previous owner / occupants included 7 adults, 2 kids, and 3 dogs. And no stove. You can imagine what it looks like inside. The previous owner tried to sell the property themselves, but, given the poor interior condition, was unable to find a buyer.
The borrower for this loan is, once again, my partner's wife. The property was purchased for $300K, and we are writing a mortgage for $220K, giving a 74% LTV. (I've rounded the numbers for simplicity, so if you do the math, you'll get a 73.3% LTV.) Fixed up, the property should sell for $390K. My partner used to live in the city this house is in, so he's got a better than usual knowledge of the area. He figures it'll take 3 months to get the place ready for sale.
The old owner is still occupying the property. He offered to leave in one and a half months and wants $6,000. My partner countered with four weeks and $1,500. No response from the guy yet. Technically, he doesn't own the house anymore, so we shouldn't have to pay him anything to get him out. But it would probably cost about $1,500 to hire an attorney to get him out and that process would take one to two months anyway. Might as well try the honey before the vinegar.
Labeling this one hard money loan #15. This one will take another third of the funds that got freed up over the past two weeks. I'm still looking for one more loan for the final third of my funds.
5 comments:
Hope the occupant does not trash the place on the way out. He probably thought the bank would take it back and he would get a nice "cash for keys" deal. Instead the house went to a third party with a tight budget and no reason to negotiate. This one looks like it's in a better area.
Have you been using seller financing or agreement for deed transactions as well?
Jason - I'm not exactly sure what you are asking. This property went to foreclosure auction. At that point, the occupant / previous owner no longer owns it - the bank does. The seller is the bank and at auction, properties must be paid for in full when purchased. They way it works is our borrower pays for the property at the auction, then we write mortgage on that property and give the mortgage amount to the buyer / borrower, kind of like reimbursing him up to 75% of the purchase price of the property.
I hadn't realized that auctions were so complicated. How can you approach a lender if you do not know what the auction price is going to be? I'm not sure that I understand.
You mean how do you as an investor buying at auction approach a hard money lender? Work backwards. Before the auction, you should have researched the value of the property - either as is or after repairs. If using an after repairs value, subtract your estimate of the repair costs from the value. Take 75% of that result. That's the maximum amount a hard money lender will typically lend you. Other lenders may use a different percentage, but we typically don't loan over 75% of the value of the property after repairs. Putting your own money into the deal as part of the down payment will decrease the LTV percentage (75% in this example) and will probably make the lender more agreeable to lending you money.
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