Okay, I have so many things going on right now I can’t think clearly. This is a question from my sister,and since I am just getting into this part of REI I thought ya’ll would be more help to her than I can. Lisa has signed a contract to purchase a 2be/2ba townhome ( I wish she would have told me first). She told me the place needs cosmetic repairs, and she wants to hold it and rent it out after the rehab. Now this is how what her Letter of Intent says:
Purchase Price: $70,000
Earnest Money: $10.00
Seller Financing: $50,000
Other Financing: $35,000
Yes I know the numbers look funny. All the financing adds up to $85K. She said she did that on purpose. She is working with a HML, that will not allow the buyer to take cash at closing, the repairs funds have to go in escrow. (OMG this is so confusing). Anyway, she doesn’t have any cash to start repairs, so you can see where the problem is. So insted of overborrowing with the HML, she is trying to over borrow, with the seller to get cash at closing. She want to know how to structure the contract and how closing will go, so that the HML won’t know what she is doing with the seller financing.
Now, I have no idea, which is why I am asking ya’ll.
First off it seems your sister Lisa is in way over her head. Is she sure that 15k will be enough for renovations, holding costs, closing costs, blah blah blah? I doubt it.
The HML probably operates on a reimbursement basis meaning all repair money is held in escrow so Lisa pays the contractors then gets reimbursed from escrow. This is how most HMLs operate and the few who will pay the contractors directly from closing is what she needs. In order for her to work with this lender and get seller financing any additional “cash at closing” will have to take place under the closing table. The seller could give your sister a separate note for like 10k to get started on the repairs secured by something thats not the subject property.
She needs to call an attorney to figure out how to structure the contract.
I have a feeling that it’s going to be all of the ancillary costs that are going to bite her in the end. This seems like a very ill prepared deal shes working on. She should of figured out the terms of the loan before signing on the dotted line.
-Have a nice day Ya’ll
This is how most HMLs operate and the few who will pay the contractors directly from closing is what she needs.
What I meant to say was "This is how most HMLs operate, and the few who will pay the contractors directly from escrow is what she needs.
LOL, Love the “ya’ll” Danny. Thank you. She is in way over her head, this is what happens when you don’t spend time trying to educate yourself, and just jump in.
Tell me if I have this right; she gets the 35k note from HML, and she also gets a 35k note from the seller. Then she must get an unsecured personal loan from the seller for the 15k. Well at least I think that is what you’re saying, let me know if I am wrong. Now how can it be structured that she gets the 15k at closing from the loan proceeds?
This is a situation where if Lisa can’t find another lender fast enough she is going to have to bend (not break) the rules or pass on the deal.
I am assuming the lender pays for the renovations with reimbursement draws. So Lisa pays the painter a couple hundred dollars upfront for paint and whatever else, shows proof of that it was paid then the lender pays Lisa back. Ofcourse to do this you need cash reserves. That’s where this problem starts I think.
I would suggest that she cut back on seller financing a little so the hard money covers more of the purchase price and puts some extra cash in the sellers pocket. Then after closing the seller can give Lisa a note for the amount that was cut back (5-10k) that doesn’t have a lien on the subject property. This money should be used to pay the contractors in order to get the first draw from the lender.
This is what my appraisal instructor would call an “indian blanket”- cut a foot off one end and sew it to the other.
Let’s recap:
Cover less of the purchase price with seller financing.
Hard money covers more of the purchase price.
Seller gives Lisa a separate note in the amount cut back from seller financing to start renovation.
She doesn’t need cash AT closing she just needs cash.
I am a little tired right now, so don’t blame me if I sound like a dunderhead. Okay, have Lisa swith up the financing, like this maybe:
Purchase Price: 70K
HML: 45K towards pur. price 10k towards repairs
SF: 35K
Then seller gives Li a note for like 5k or 10k.
Sounds good, but that brings up another question, if the sellers note after closing is not attached to the property how can Lisa be sure that she gets it, and the seller doesn’t stiff her, unless she puts it in the purchase contract, therefore notifying the HML that the seller will be paying her after closing?