Pros...please help newbie....1st deal

I’m looking at my first deal and wanted some advice from the pros. Details are as follows:

single family home
bank owned
(demand may be high, may have to pay list)
$55k list price
$20k estimated repairs (estiamed 6 weeks to complete)
$95k after repair value

My financial situation:

$25k in checking
no debt other than mortgage on personal residence
(only $20k in equity in personal residence)
600 credit score
$75k in IRA’s

How should I finance this deal? I know the margin is tight, but the risk is low. The property is 1 mile from my current residence, so it would be easy to manage. If I could make $10k on my first deal and learn a lot, I feel it may be worth it.

Any input you have would be greatly appreciated.

I forgot to mention that I would like to rehab it and sell it.

Hi meench,

Wow, looks like you’re sitting on a good deal. It also looks like you have a pretty good financial foundation to work from. I wish I was in your shoes man. My portfolio doesn’t look that good yet. But let me offer a word of advice, that sometimes having a lot of money to work with can be a liability because you may use it as a crutch. The more you have, the less creative you become with financing. Also, it looks like you can do this whole deal with other people’s money.

Go looking for a mortgage broker that deals with RE investors. Tell them you want a one-year interest only loan that you’ll use for rehab purposes. Get it for 70-80% of the ARV, with no downpayment. It may be hard to find, but they do exist. The only catch is that you’ll have to sell the house in a year. Good luck and let me know how the deal turns out.

Howdy Meench:

You have several choices since you are in good financial shape. Where is the $75,000. If it is in a bank then go there and get some of it loaned back to you. Do not use the money but put up the house. They will probably loan you all the money you need to buy the house and escrow the repair money too.
Another idea is just to use credit cards to buy it. You can look around and even find some good rates.
Hard money lenders offer easier to borrow funds and can loan up to 70% of the after repair value. Usually a little expensive with about 5 points and 14% interest but this may be a good choice. You will need abot $10,000 of your cash to do the deal.
There are also one time close loans and even FHA rehab loans where they advance the money to buy the property and escrow for repairs and once completed will roll the loan into a 30 year loan. With this option you could sell the house on a lease option or do owner financing. You could get $5000 down from a buyer and receive a monthly profit.

Keep in mind the soft costs of all the above ways. Points, closing costs, appraisal, commission, all add up fast. I may suggest offering $50,000 and maybe agree to pay $52,500. I just made a similar offer on a house with only $5000 in repairs and a ARV of $100,000. It too is a REO but did not yet have a list price. I can pay up to $60,000 and be OK. I may have to use a few grand to do the deal but like you sais above it will be a quick turn around as it needs very little work and should be ready for resell in a few weeks instead of months like three others I am currently doing.

Even thought it is a marginal deal about the worst thing that can happen if you get a good deal on a rental property and with your income and financials you may be able to use the tax benefits. I see nothing but a win win for you on this. What are you waiting on. Dive in and do it today not after Christmas, not after the first of the year. Fax in the offer right now. Havibg the offer submitted you will learn a lot fast about financing and rehab etc. It is amazing how fast you put stuff together with a deadline or goal in front of you to work with instaed of saying someday I will you will be saying wow I bought a house and get so excited and it will be a lot of fun too. You do not sound like a worry wart or the type to sit and think and plan and think about all the what will happen if this or that happens. I believe this is the number 1 reason for not starting. The what if I like is what if I do it and make money and it is fun too. I try to think this way about everything I do and try not to worry but be happy and make money.

Hope this helps some. Merry Christmas too

First, I really appreciate you guys taking the time to respond to my plea for help. Your advice is educational and motivating.

ok…so here is the update…I sent in an offer for the house…!!! Ted, you were right…why wait…the worst thing that could happen is that I have a good rental property. Anyway, the bank called back and asked for our final and best offer and that there were 2-3 offers on the table. We are willing to pay the list price of $54,900, although I think they will receive an offer higher than the list. Anyway, I started calling mortgage brokers to see if I could get a 1 year, interest only loan of 70% of ARV, but no luck so far. Since the margin is thin, the hard money route seems too expensive. So, here is what I may do:

  • pull $55k out of my IRA temporarily and pay cash for the house (the money has to be returned to the IRA within 60 days to avoid tax and penalty)

  • after closing, take an equity line of credit for the maximum that I can get 80-90% and use that money to pay back the IRA. Since I will still be short in paying the IRA back, I will take the rest from my checking account to pay the remainder.

  • that will probably leave me with only 5 - 10k left in checking to pay for rehab. Estimated rehab is $20k, so I’m 10-15k short. Credit cards may have to pay for the rest.

It feels good to get my first offer out on the table. Lastly, when we were looking at the house, there was a guy who just stipped in to inquire if the house was for sale. We tried to blow him off because we wanted it for ourselves, but he was persistent and has called our realtor (who happen to find us this opportunity) at least 3 times to inquire about buying the house. He says that he wants it for his grandmother and that he also lives in the area. Maybe, I’ll just close ont he deal and then add $5k to the price and sell it to him as is. I’ll take $5k profit for just flipping the first deal.

Anyway, thanks again for your help. Your comments and suggestions on this site are very motivating. I’m looking forward to making this a full time gig in the next 2 years.



Howdy Mike:

That sounds creative. I was not sure about the IRA and how that works. That sounds great. You may even sell it without even buying it just by flipping the contract if allowed by the seller or if not disallowed I should say. I always like the idea of making all that I can from a deal and buying and rehabbing and getting retail but a quick $5000 is good too.

I am glad I could help a little and get you motivated. I just made the same decision myself. I have too much on my plate right now eith two full rehabs and a 31 unit rehab but I made another offer with some partners on another house that only needs a little work. They agreed to get the work done if I can get her bought and financed. the part I like best anyway.

Keep us informed and even write a success story and post on the site here,