Advice needed QUICKLY, thanks in advance!

Hello all,

My name’s Dave and I’ve got a deal here, but I’m not sure how to proceed. I could really use some help! Thanks in advance. TIME IS AN ISSUE.

I found a house for sale through a relative that’s a fixer-upper. It’s not on the open market, but they would like to sell it to me. They are willing to finance some of the sale price to make a deal work, if I can move quickly. The house is in a GREAT neighborhood in Philadelphia and appraised for $535,000 in January of '05. They are willing to sell to me for somewhere in the $250-300k range. A smaller house in better shape across the street sold last February (in a week!) for $600,000.

This house needs a lot of work. It needs a new roof, all new wiring (knob & tube), all new plumbing (galvanized iron), a new kitchen (appliances are 30 years old), new bathrooms, etc. There is also mold contamination that will have to be remediated, mostly due to all the junk in the house, but also because of some leaky plumbing. The house is absolutely TRASHED - there is literally junk everywhere, knee-deep. Most of it is newspapers, magazines, boxes, etc (see pictures) but there is some pretty valuable stuff there, too - a lot of nice china, silver, and some VERY nice furniture. They’re selling the house as-is.

I have to stress that due to the location of this house and other market factors, my ABR estimates that if I buy the house for $250k, I can spend as much as $300k on the renovation and still make a positive return (!). With a new kitchen, new bathrooms, some landscaping work, new wiring and lighting and a weekend with a power-washer, it should sell for $700-750k.

While this all sounds great, the problem is on my end. I’m 22 years old and while my credit is good for my age (FICO 680 last I checked), I don’t have any income or savings to speak of. The estate that’s selling the house is willing to pay me to clean it out - they want the furniture, photographs, silver/china, etc - and they are also willing to write a letter verifying income for doing so. We’re still negotiating on the figure but it will fall somewhere between $30k and $45k.

I know a lot about real estate, because I have been working as an intern for a local real estate developer for the past 2 years, and I’ve read every book I can find on the subject - Kiyosaki, de Roos, Berges, Whitney, Bronchick, Conti, etc… my library of real estate investments books numbers over 300.

IN SUMMARY, here’s the issue:

• House appraised at $535,000 as-is
• Purchase price $250-300k
• House needs at least $100k of work, possibly up to $250k
• In perfect shape, retail value is $700-750k
• My credit score ~680 FICO
• I can get a letter saying my income is $30-45k for cleaning up the house, but I will not have that cash available since it’s actually just coming off the purchase price
• Estate is willing to (privately) finance as much as 1/3 of the purchase ($83k-$100k), and is willing to take THIRD lien position
• I have no $ for a down pmt
• I have no $ for closing costs, but the seller has agreed to pay for those
• TIME IS AN ISSUE
• Owner occupied (once I figure out how to make this deal work, I plan to occupy the house for 2 years to satisfy the IRS primary residence requirements for Section 121).

I could really use help with this, and if you have any ideas or suggestions, I would really appreciate it. Please feel free to ask if you have any questions or need more information. Thank you very much for your help!

Pictures here:

http://www.davemuscato.com/pa/1847lambert/photos.html

Please respond ASAP! Thank you,

Dave

I forgot to mention, I am also a first-time homebuyer and qualify for any special loan products for first-timers.

Thanks,

Dave

Hard money loan…see link on the left.

Thanks for the tip; I just bcced all the hard money lenders on the list that do residential loans in PA with an explanation of the situation and my needs. I’ll post more when I know what’s up.

If you guys have any other advice or ideas, I’m all ears!

Thanks very much,

Dave

The outside of the house has a very good style to it and it looks like alot of floor space. Electrical is going to be very expensive and it appears that it may need a new roof soon. It sounds like you are getting a very good deal on it. The house will look much better when it’s empty. Watch for any antiques and don’t through away good stuff that could add to your profits.

Get it under contract. I have worked with Rehabfunding out of Wynnwood PA. Rehabfunding.com. I went through 4Rmanagement who brokered it to Rehabfunding. Bob is very good and perhaps he can drive by if it’s close to Phili.

Let us know how it works out and good Luck!
NDI

Thanks NDI,

Coincidentally, I just emailed Rehabfunding.com; I found them on a Google search a few minutes ago.

It definitely needs a new roof!

Rehabfunding.com doesn’t do owner-occupied, and I asked about that in my email. I’ll see if I can talk to Bob about a way to make this work.

Thanks very much,

Dave

Don’t tell them you want to treat it as owner-occupied. Treat it as a non-owneroccupied purchase. Refi later and pay them off.

You don’t think it would help, considering the fact that I’m also a first-time buyer? I understand that there are special loan programs available for first-timers, and also, considering the scope of the rehab, it will probably take me 1-2 years just to get all the work done (this is my first major project). Being an owner-occupant would entitle me to a capital gains tax exemption… it seems like that would be a good thing.

Thanks for the advice though, I will definitely look into it!

Dave

Hi Dave,

I noticed you had a 573 area code. I’m up in St. Louis, so maybe were fairly close if your not already in PA.

This is definitely a hard money loan and you’ll find that a lot of HMLs wont do owner occupied.

I sent you an email so we can discuss a couple options about lenders that can get this done for you.

Dave

I took out a HML from Rehab on the house I Just completed a major work on and then refinanced it as an owner occupant. Yes there was a Gray area and you sign a document that says it will not be Owner Occupied. They can kick you out quicker than an owner occ. In order to get the financing for it a cash out refinance you will have to accutally move into it. We did it and it worked out fine. You can send me an email if you want to talk about it. I don’t think you have to worry about it.

Deals like this don’t fall into your lap often so you have to act on them when the present themselves. Do you do diligiance (I didn’t like spelling)LOL. Get comps and realtor opionions. Bob will make you get an aftervalue appraisal and you will need to do a good construction budget at the 65% LTV.

You should also consider partnering with someone else to get this deal done if things don’t work out.

Good Luck!

Dave

You will not want to take a year to Rehab this property the interest rates will kill you. I would not consider living it while you rehab that will be treated differently by rehab funding.

From the pictures the walls look pretty good and a good electrican will be able to snake new wires through the walls without breaking them open. The cost of the job will go up significantly if you open walls. Most plaster can be patched fairly well after it’s retextured.

The roofing will be another major expense but you should be able to get most of it done on a decent construction budget. Get bids and if a contractor does not get back to you go on. I will call 3 or 4 contractors and only 1 or 2 will show up. Make the sign contracts for start and finish dates.

NDI

Cheeky

Your going to have state an income that isnt there. You can go for it if you choose but we all know that is illegal. There is no 2 year job history to verify. Definitely take this hard money. all day!

Just looked at the pictures. It doesnt look so bad, besides the wiring and new roof. Just use that dumpster out there and clear the house out. you can probably get it done in months not years. I’d push for 1-2 months.

I did not see any info on employment history–

IN SUMMARY, here’s the issue:

• House appraised at $535,000 as-is
• Purchase price $250-300k
• House needs at least $100k of work, possibly up to $250k
• In perfect shape, retail value is $700-750k
• My credit score ~680 FICO
• I can get a letter saying my income is $30-45k for cleaning up the house, but I will not have that cash available since it’s actually just coming off the purchase price
• Estate is willing to (privately) finance as much as 1/3 of the purchase ($83k-$100k), and is willing to take THIRD lien position
• I have no $ for a down pmt
• I have no $ for closing costs, but the seller has agreed to pay for those
• TIME IS AN ISSUE
• Owner occupied (once I figure out how to make this deal work, I plan to occupy the house for 2 years to satisfy the IRS primary residence requirements for Section 121).

$250,000 total rehab?!?!?! You’re going to spend that much on dumpsters. But I love the look of the house from the outside and see some nice potential, speaking from my amateur standpoint. I hope you’ll post more pics as you get further into fixing it up.

Naperbill

Sounds like to me it is a pretty good deal. You might want to consider a partner on this deal. Atleast someone who can help fund the project.

Thanks so much for all the advice, guys. I really appreciate it.

My FICO is actually a littler higher than that - I’m always conservative on the good points and I overestimate the bad points, just to make sure I’m not getting into a marginal deal. It’s just a good habit when you’re evaluating investments, IMHO.

Last time I checked my credit, my one credit card had a balance of $1300 (limit is $4000) that it doesn’t have now. It would not surprise me if my FICO is closer to 700.

I’ll keep you guys posted with updates. I sent out about 20 emails to various hard-money lenders and other investment companies last night. More coming soon.

Thanks,

Dave

I found a mortgage broker, Ben Carmona (bencarmona.com), who works with some hard money lenders in St Louis. I have given this a lot of thought and I think that hard-money is the best way to do this, given my (lack of) income and short credit history.

This broker is able to get me a loan for 70% of the after-repaired-value of $700k (i.e. $490k). To do the deal, they’ll need 5 points and 4 structured payments set aside up front. The payments would be $5,716 (14% APR, interest-only pmts for a six-month loan), and after six months I would refi with a no-doc ARM, hold the house until the spring of '07, and then resell when the market is a little healthier. Subtracting $24k in points and $23k in structured payments, that leaves me with $440k for the purchase and rehab. I estimate a total rehab cost of $240k including 20% padding above my highest bids, so this would leave $200k for the purchase. The estate is/might be willing to finance as much as 1/3 of the purchase price on a junior lien; therefore I could pay up to $300k for the house total (if the estate carries $100k).

I would like to stress that I would prefer to get a loan for only 65% of the ARV ($455k), in which case my maximum purchase price would be about $265,000, including $88k of seller financing. I think there is a strong possibility that the sellers will agree to this number or even less, and the 70% loan will not be needed.

Three possible deals would look like this:

IDEAL FOR ME:
Purchase price $215k, $45k check back at closing for my work cleaning out the house, with a 33% owner-carry 2nd mortgage ($71k).

MIDDLE RANGE:
However, I would still agree to a $250k purchase price, with a 30% owner-carry 2nd mortgage ($75k), and a check back at closing for $30k.

WORST-CASE BUT STILL WORKABLE:
The MOST I can afford and still be able to swing the deal is a $300k purchase price, with a check for $20k back at closing, and the sellers financing 27% ($80k).

What do you guys think?

Thanks in advance for your advice & opinions!

Dave

Wait!

Is your Hard Money Lender going to allow cash back at closing? Most HML’s that I’ve looked into all seem to want to put all overages into escrow (along with the rehab funds).

So, you said that you don’t really have any income, right? So how are you going to pay your monthly payments on the HML? And, how are you going to pay for the rehab? Most rehab funding is held in escrow and paid in arrears (meaning, they reimburse you for each stage of work AFTER IT’S COMPLETE!!)

It’s like catch-22, you’re borrowing the money to do the rehab, but they don’t release the funds until after it’s done . . . .

Three possible deals would look like this:

IDEAL FOR ME:
Purchase price $215k, $45k check back at closing for my work cleaning out the house, with a 33% owner-carry 2nd mortgage ($71k).

MIDDLE RANGE:
However, I would still agree to a $250k purchase price, with a 30% owner-carry 2nd mortgage ($75k), and a check back at closing for $30k.

WORST-CASE BUT STILL WORKABLE:
The MOST I can afford and still be able to swing the deal is a $300k purchase price, with a check for $20k back at closing, and the sellers financing 27% ($80k).

What do you guys think?

Thanks in advance for your advice & opinions!

Dave

I told the mortgage broker I’m working with about the money back at closing, and he didn’t mention a problem with that. I’ll ask him directly though; thanks.

Re the catch-22, yes, it’s an issue! I do have some funds available, and I do have income, although it’s limited (~$1k/mo). If it works for me to get a check back at closing, I will have somewhere between $20k-$45k liquid that I can use for the first phase of the rehab. Also, the first phase is relatively inexpensive, because I’m doing a lot of it myself - essentially, I’m paying myself to clean out the house. I’m hiring a friend to help with that part, but for far less than fair market value, and we should be able to put a figure to the HML that they’ll agree with, to release after the cleanout, which I can then use for the first phase of the actual remodeling.

I’ll keep you posted. If you have any questions or advice, please don’t hesitate!

Thanks,

Dave