I am in the middle of a fixup and sell project- so my cash and credit is probably too extended to get conventional financing on another property. I have since located two different properties that fit into my fix-and-flip investment strategy. I would like to purchase one or both properties, so I will likely need to use a HML- but I have some questions.
Let’s use the following example for discussion purposes: Property ARV is $100K. Purchase price $60K. Repair costs $10K. I am aware that there are probably different programs for each lender, but I am just trying to get an idea on how the mechanics generally work.
How does the HML determine the ARV? Is there some type of documentation or list of planned repairs and costs as well as comps that you provide them with?
Does the HML provide any money for the repair costs? If so, when is it provided - at closing in a lump sum, or do they hold it in escrow? If it is held in escrow, when is it distributed? For example, will they only reimburse you for materials/labor after you have already paid for them, or will they give you the money before you actually pay?
If you pay a HML 5 points for example, when do you pay them the money? At closing, or when the loan is paid off? For instance, on the above example would I need to bring a check for $3K to closing (for 5 points on $60K)?
I have some other questions, but this will hopefully get me started.
The HML will order an appraisal and the appraiser will determine the value after repairs using comps in the area that are fixed up and like yours. Usually the appraiser and lender will want a list of repairs you plan to do and a cost break down as well. My lenders appraiser also helps determine if the budget is in the ballpark for the work needed to be done.
My HML will provide repair money and deposits into an escrow account with the title company. Usually once the repairs are done I get a draw for that amount. I have a $220K job going on now and get $10k to $20K draws once the work is complete. I actually got a 410K advance to start but this is not very common with HMLs in general.
The points are paid at closing. I get my deals where the points and rehab and 5 months interest and purchase price are less than 70% of the FMV and i have very little out of pocket costs. I usually borrow those as well on a second mortgage.
Excellent feedback, thank you. I do have a couple more questions for you, if you don’t mind.
Let’s say a HML will do a loan up to 70% ARV… We’ll use the same example- $100K ARV, 60K purchase price, 10K repair cost, 3K in points (I realize I’m not factoring in carrying costs, insurance, etc- I’m just trying to keep the numbers simple).
Based on the above example, would the HML cut a check to the seller at closing for $60, and cut you a check for $7K? Is it possible to walk away from closing with cash in hand? Or will they only provide a check to the seller at closing, minus the points?
I guess what I’m really wondering about is when/where I will be able to get the money for the necessary repairs (I am fairly extended on another rehab property, as I mentioned in my original post)? If I understood your reply correctly, I would need to pay for the materials/labor, and then I would be reimbursed out of escrow- correct?
You mentioned doing a 2nd mortgage in addition to the hard money loan… Do you normally do that at the same time that you close on the property, or awhile after you take possession? Do you normally do the 2nd through a conventional lender? If so, what type of documentation, etc. will the lender of the 2nd need in order for you to get the loan? Would they also order an appraisal on the property? When you close on a hard money loan, will the lender provide you a copy of the appraisal that was done (and could you just provide a copy of it for the purpose of obtaining the 2nd?
Sorry to hammer you with so many questions on this- I’m just a little out of my comfort zone.
The $7K would be held by the escrow agent such as a title company and you would get the money as the repairs are complete. You can sometimes get contracts to wait to be paid until you get paid or get credit from suppliers.
My second lenders are private individuals. They differ as night and day. I do not believe you could get a conventional lender to do a second behind a HML. I pay high rates of 36% interest.
The lender has to provide you a copy of the appraisal.
Tedjr has done an excellent job of addressing your HML questions. If the loan works as you have illustrated you would not need a “down payment”, rather you would need to cover all costs not covered by the loan. Be sure you use a Direct HML. I am sure Tedjr has some good referrals What state are you in?