Hard Money Advice for 1st Deal

I finally came across a property that looks like a good deal…a very good FIRST deal! But I need to act quick and get some hard money advice as to what are the current terms.

Property in Burbank CA
1 Bed / 1 Bath
Sq/Ft: 750
Lot: 2750
Owner Purchased: May '02 for 204K

Everything is current, only 1 lien which is the original for 193K and roof needs repair. Owner is not comfortable with the idea of him holding the first mortgage. However, when I asked if he can discount the price if I get him cash within 3-5 days, he said yes.

Spoke with owner last week and was selling at 500K. Yesterday he drops to 450K. Today he discounts to 310K.

I had a loan officer in my investor group check with his appraiser,
and said the value is about 440-450K.

Exit strategy would be to sell below fmv for 400-425K

Purchase price: 310,000
Repairs: 5,000
Hard Money Costs: 5,000 (10% is 3,100)
Selling Costs: 15,000 (3% is 12,750)
Total: 335,000
Sale price: 400-425K
Profit: 65-90K

Considering the repairs, borrowing and selling costs may be lower, I am still leaving room for margin.

Please let me know if I am leaving something out or I am failing to see the big picture.

why are you doing hard money? it’s expensive.

Hello wagner and thank you for your post. What other options would you suggest for me?

Doing a HML could be a problem. Most HML want only to do 70% of ARV. Looking at $440k ARV that becomes $308k - not enough to do your deal.

On the loan you typically pay 4-8 points plus 12%-18% interest. So the HML costs for 3 months will be conservatively:

$12.5k (points)
$9.5 (interest)

$22k total.

If you look around hard, you could find a lender who will do more and better, but you have to look for them, and the ones with the cheaper rates normally want a longer closing time - 30 days or so. For a 1-5 day close, most HMLs terms are much tougher with points and interest. To do something like this, you should already know some HMLs and what their terms are. To sign up a deal and then go scrounging for money - at the same time you are hassling with title, escrow, inspections and everything else on a 5-day deadline is real tough - even for an experienced investor.

Also, there are other soft costs I don’t think you are accounting for - taxes, utilities and the like that you will be responsible for.

Also, the “standard” formula for “good deals” doesn’t hold up with yours. Using your figures:

 $440k                     ARV (always use lowest for safety)
 $308k                     70% highest price investor wants to see
-  $25k                     Repair/Holding/Transaction Costs
 $283k                     Highest purchase price to be considered.

The reason is right now it only seems like $5k in fixup, and quick sale, but so many times you get in there and find mold that needs remediated, or electrical problems you didn’t know about, or a zoning problem…? the next thing you know your rehab costs have doubled, or more, and you need the cushion to take care of that.

I would guess your true numbers would be closer to this:

$310k purchase price

$22k HM Costs
$18k soft and selling costs
$5K Rehab (probably more - but use your number here)
$45k Total costs

$400k Sale Price (Be conservative for planning - if you get more in this market - fine)

$45k Potential Profit - not dazzling for all this work and risk.

I invested in California for years and the big numbers can be beguiling. But still, the ratios matter. A lot of would be investors have crashed because they thought a potential $85k was worth it, but when you are talking about a $440k property that is only a $19% potential profit, and most first time investors overestimate sale price, while underestimate repairs, time spent and soft costs, thus drastically overestimating profits.

My first thing I would do is hit the phones hard and get some solid info on your local HMLs and find out what money they have available and for what terms for the type of transaction you are planning. See if they have prepayment penalities - many do for transactions taking less than 3-6 months.

Granted, I would probably do the deal, but realize it is not as fabulous as you first thought. And I would be working hard to get the price down to around $275k.

find a banker who knows you and what you’re trying to do. 90% loans (even with an escrow for repairs) are available at minimal cost and much lower interest. 22k for HML is insane when there is other funding available. that’s money OUT of your pocket (and into his) just because you won’t look for other funding.

unless your credit sucks.

$22k costs on a HML is what you would see -

4 points on $310k - $12.4k
3mo@12% - $9.3k

Total Minimum HML cost $21.7k

And probably much higher.

The advantage of HML is you close fast - normally in a few days - and your credit/DTI or any other ratio is basically meaningless.

The easiest, most profitable way, of course, is with your own cash. However, HML is still cheaper than bringing in a partner.

And those 90% loans will take 3-8 weeks to close in today’s market. The good deals will be gone by the time you could close.

The good deals will be gone by the time you could close.

I don’t have to close 'em, just get them under contract. I may lose a few, but I don’t have to replace many 22k’s to come out ahead of you.

You can always get pre-approved, have your contractor in place, etc… so when the deals falls in place only the property has to be approved. This can cut down considerably on the turn times of conventional rehab loans.