What's The Best Way To Finance A Fixer?
I know it varies but if you were to do it conventionally or with a hard money lender, how does the appraisal work? Do they appraise it at ARV (after-repair value) or on the current condition of the property? For example, if there is a fixer SFR that's listed at $120K, it needs $20K in fixing, and comps are around $170K for the area. Using a hard money lender with an 85% LTV loan on the property, I would get $144.5K. I would purchase the property, fix it, and sell it at the FMV of $170K taking a profit of $25K minus other fees/costs. Is this what a typical rehabber will look like? What are your opinions on HMLs and preferences on financing a fixer? TIA for your replies.
Leo_Investor,
It sounds like a GOOD deal to me....
....however I don't think a HML will finance at 85% AMV.
....as always.
GoodInvesting, Rocky
It would depend on your credit score, but you could possibly finance it thru a construction loan. Speak with a good mortgage broker about your options for financing deals. That's your best course of action.
HML's will only loan to a max of about 70% ARV and usually only 60-65%.
good luck
Roger
Thanks for the replies.
What do most of the rehabbers here do to finance their fixers? Would going through a mortgage broker for a conventional loan be the most common avenue? My credit score if above 700 but I don't have much of my own money to put into rehab costs and such.
One more question, for fixer upper properties, will the bank appraise it at after repair value? And do they base the ARV primarily on comps in the area?
Thanks again.
Leo_investor,
This is how I do my rehab projects. I locate a under valued property that is in need of improvements. I get a GC to walk through he unit/units with me so that we can make the plans as to what I would like to have improved. The GC will then do a work write up spelling out all my repairs/improvements. The general contractor will then get an itemized write up of the cost of each stated repair/improvement (detailed list, stating quality or brand name that of heating/cooling unit, kitchen items, bathroom items, ect). All cost are clear and easy to understand.
I then take this work write up along with the contract to purchase to bank. The banker then send out an appraiser out to the unit with the work write up in hand. The appraiser will then give the stated value based on the improvements that I have on my list.
The package is then give to the construction loan department. The construction loan is short term loan appox. 6 months. I package then goes back to the mortgage department at the back for long term financing.
What I attempt to do is this: 1.) Get value with improvements to be around 78% of the completed project cost. Say the cost of the property is 100k, rehab cost of 100k, the appraisal value must come back at around 248K. This way I can make it a no-money-down-deal.
This does work, because I have located and started two such project within the past four months. I hope this helps.
Thanks for the reply Vern.
How much does a GC usually charge you for the walk through and repair estimates?
Is the construction loan for the actual rehab costs? And the mortgage loan is for the purchase of the property LTV of around 60-70% of the after-repair value of the property? So two loans are taken out? Do you typically use HMLs for the mortgage loan? TIA.
Hello Leo,
I don't pay anything to have the GC come out and view the project. Normally I get two bids for the work.
As to the contruction loan. This loan covers the purchase cost and the rehab work.
I will only do the project if I can establish 20% equity in the property after it's completion.
Thanks for your reply Vern.
A few more questions please:
1. Does the seller of the fixer usually have an idea as to how much it will cost to rehab the property? I'd imagine that when screening for a good fixer investment that you at the least have an idea to how much the total cost is so you don't waste the time of the GC. Is this how you initially screen through properties?
2. Is a construction loan fairly easy to obtain vs. a conventional loan?
3. Do you work with banks that specialize in financing investment props.?
4. You mentioned the construction loan is for 6 mos. Do you mean the entire principal is due in 6 mos?
5. Is it fairly easy to convert to a conventional mortgage loan from the construction loan?
6. With a construction loan, do you pay the normal closing cost fees and would then pay again when you apply for the mortgage loan?
I apologize for all the questions. Just trying to get a feel for rehabbing. I'm just about done reading through Jay Decima's 'Fixer' book. It's a very good book. Thanks again for your help.
Hello Leo,
I hope to answer most of the questions that I can recall.
1. I don't know it the seller is aware of what it cost to rehab the prop. It does not matter if they know or not. You have to stick to your investment goals.
2. As to the cost of the rehab work, I have gained an eyeball or ballpark cost for the repairs and appraised value after completion of repairs. I usually am within 7k +/-. You just got to have some idea of what you want to have have done to bring the prop up to standards. Walk through Home Depot and Lowes and other building material outlets. You will begain to develope these skills that will put you in the ballpark.
3. On finanicing. I got my construction loan for 6 months at 4.5%. I thought the process was really easy to apply.
4. After the construction is completed, you just go back to the bank to have permanent finanicing placed on the prop. After the work is completed, you get another appraisal done. You try to make sure that the prop will appraise at 22% above your purchase and construction cost. If you can be at 78% LTV, you will not have to put out any money.
5. I have already forgot what the other questions were. I hope this will get you going in the right direction.
Vern
You have provided some very interesting info. What is the usual LTV required for the construction loan? On a 100,000 deal with 20k repairs and a final value of 145,000 what would the bank typically require down for a construction loan covering the 100,000 for purchase and the 20k for repairs
Hello Clayman,
I went through Central Bank. Central Bank has a mortgage loan department and construction loan department. I pre-'qual's for the mortgage based on the lay out of cash and all on the LTV. Therefore, I am not sure how to answer your question. The mortgage loan dept was willing to do my loan a 80% LTV based on the finished project.
Now in your case, you will not have a true 80% LTV project. You will just have to make up the difference with your own money. You will be about 4k short, plus the closing cost. Mind you now, your deal is not a bad one. You are still talking 25k instant equity at the completion of the rehab.
Good luck
Hello Clayman,
I went through Central Bank. Central Bank has a mortgage loan department and construction loan department. I pre-'qual's for the mortgage based on the lay out of cash and all on the LTV. Therefore, I am not sure how to answer your question. The mortgage loan dept was willing to do my loan a 80% LTV based on the finished project.
Now in your case, you will not have a true 80% LTV project. You will just have to make up the difference with your own money. You will be about 4k short, plus the closing cost. Mind you now, your deal is not a bad one. You are still talking 25k instant equity at the completion of the rehab.
Good luck