Here’s the deal, located in Cambridge, MA (hot condo market):
List Price: $750K, being sold as 3 units, 1/1.
My goal is to rehab and convert to condos, conversion already done except for registering the master deed with the Registry (cheaper to buy and THEN finish conversion).
Rehab costs est: $80K
ARV PER CONDO = $370K (per comps in area, range from $365 - 390, being conservative) $370 X 3 = $1,110,000.
I’m looking for what seems to be impossible, as I have basically ZERO cash, and NO RE collateral:
I need 100% financing for the acquisition cost, as WELL as rehab costs. Interest rate I’m expecting to be high. I currently have NO collateral to secure the loan besides THIS property itself. If at ALL possible, 0 payments for 6 months is highly preferred, again due to no cash available.
Seller is willing to carry $50K on a note.
I KNOW there’s money to be made here, and it almost seems I need to find a private lender, but many need RE collateral to secure loan. I’ve spoken with numerous brokers and hard money lenders, and it seems like I either need cash or collateral (which is VERY understandable), but I have neither.
This loan would be split between two people (money / rehab partner already in place, but she is in the same boat I am), and my credit score is 719…can anyone help?
Trying to play the Real Estate game without cash, equity or other financing readily available is going to be a losing proposition. The reality of the situation is that you are looking to get a loan on a property that will have no cash flow for several months. No lender wants to take that risk unless you have cash reserves or equity in another property that can cover any potential losses should you default on the loan. Your personal credit will also obviously play some part in the lender’s analysis.
The smart thing to do would be to understand what financing options that you have available BEFORE wasting time pursuing projects that you will not be able to get financed due to limited resources.
However, even those who do have good credit and some financial resources would still benefit from the following:
Find a PRIMARY lender who understands rehab projects and specializes in lending on them.
Understand what those primary lenders will allow in terms of SECONDARY financing, such as, equity, hard money, bridge, seller carry-back, reserves, etc… The secondary financing is what will supplement any cost not covered by the LTV that the primary lender will provide.
Go out and find SECONDARY lending sources such as equity partners and/or hard-money lenders and understand what type of projects that they like and understand how their loan programs work with PRIMARY lending sources/programs and have those SECONDARY lending sources lined up BEFORE you go looking for projects.
Be willing to do what it takes take the risk out of the deal for the lender. There are several techniques you can use and things you can offer the lender to do that and give you a better chance of getting your deal financed.
The point is to have ALL of your financing lined up FIRST and to have a solid financing source BEFORE you go on a “wild goose chase” for deals and projects. Doing so is almost as good as being a cash buyer because you then KNOW where your financing is coming from.
Bottom line, properties without cash flow are much harder to finance; particularly multi-units (let alone commercial). It can be done, but you have to do your homework UP FRONT.
My partner is able to at least split the RISK we would take on from a conventional bank.
And this actually ended up working to our benefit; the seller and I were able to work out a creative financing agreement using bank AND seller financing, secured only by the property itself, to fund both acquistion and rehab costs. I learned some valuable creative financing lessons with this deal, and I plan on using them in my future deals as well.
Hard money will still be an option when I need to close quicker than a conventional loan would allow, and hard money lenders are great contacts to have; but why pay the extra interest when the seller is willing to help out, and conventional lenders qualify two people for 100% financing due to high credit scores and low risk factor?
But in all seriousness, thanks to all for your posts; I will be sure to take them into consideration in doing my next deals, but hopefully this deal will provide me with enough cash so I will be able to take a much better position in negotiations with my next one as well.