Very basic newb question

Financing, Hard Money Lenders, Private Money
1

Sorry if this is too basic but I just don’t know the answer.

My current home
owe 375 K
worth 475 K (conservativly)
would probably take 6-8 months to sell

Home I’m looking at buying to fix as I live in it:
distressed seller price: 585 K
basic upgrades: 35-50 K
value fixed up: 700 K

I have excellent credit and income

I could do more to the home and get the value up to 800-850. It is in a very exclusive golf community in Florida so resell isn’t that big of a concern and the upgrades are all cosmetic. The house is incredibly sound.

My question is the BEST way to get the equity out of my home, buy the new one with as little out of pocket as possible, have the lowest payment for the shortest amount of time AND get as much cash as possible for the work.

I want to fix this thing and be out in 2 years MAX.

Any ideas would be very welcome.

2

If it the ARV is $700,000 but it will take $35-50,000 in repairs and 6% in Realtor fees to sell then that leaves you with:

  • 700,000 (sell)
  • 585,000 (purchase price)
  • 42,000 (realtor fees)

  • 50,000 (rehab)

= 0 profit, but huge risk due to the high price and heavy carring cost. I wouldn’t do this unless you bid significantly lower than $585,000. My two cents.

3

Based upon your comments, there are owner occupied rehab to perm loans you might qualify for.

Speaking to what other poster mentioned, you are seeking a loan with a 90-91 ARV allowance; this is outside the working parameters of hard money.

I’d like to see a purchase price of 518K or lower to allow for a 20% equity buffer in your new primary residence.

Regards,

Scott Miller

4

It seems the profit would be:

Old house:

Sales price: $475,000
Realtor Fees: ($28,500)
Current Mortgage ($375,000)
Holding Cost 8 months @ 6.5% interest only ($16,248)
(interest only because any principal reduction will be realized upon sale of the home)
Net profit from sale = $55,252

New Rehab Home:
Purchase price= ($585,000)
Rehab= ($50,000)
(Realtor fees paid by seller)
ARV= $700,000
Net equity= $65,000

Or am I missing something?

You could do a bridge loan on the current home, but you don’t have enough equity to access enough cash for the project according to the guidelines of bridge loans that I have seen.

You could also take out a home equity line and draw on it as you do the rehab, and pay it off when you sell the home. Borrow 100% of the purchase price on the new home, and refinance it after 6-12 months if after looking at the numbers a refinance is financially smart.

5

The old house doesn’t have anything to do with weather or not buying the new house is a good idea. He will be buying the new house and only living in it for 2 years or less, so it is an investment decision and not a personal residence decision to me.

New House:
If it the ARV is $700,000 but it will take $35-50,000 in repairs and 6% in Realtor fees to sell then that leaves you with:

  • 700,000 (sell)
  • 585,000 (purchase price)
  • 42,000 (realtor fees)

  • 50,000 (rehab)

Zip for profit and lots of risk.

Plus you will likely have to pay the buyers closing costs and sense you will be living at the property that means when you sell it there will be an overlap in PITI between this new property and the next property you buy in 2 years to live in. There is no profit here unless you get it far less than the $585,000. Plus why would you want a $700,000 house, keep the old house and save your money or invest in smarter investments than a $700,000 personal home.

6

Thanks so much for the feedback.

I’m probably not going to do this particular deal but the things I’m learning regarding financing are great. I’ll take the advice and just do some much smaller projects that don’t require a move( better for the marriage ) :biggrin

As to some specific questions on a bridge loan;

If you do a bridge loan do you vacate the current home right away or once you sell it?

Theoretically, could I not take the equity out of my current home with a bridge, (say 50K) and do a zero down IO on the new house?

I’m doing a lot of reasearch on my own but hearing from experienced and knowledgable investors is sure a big help. Once again, Thanks for the feedback.

7

rbaxter,

Now I see where you went wrong. When he bought the place for $585,000 he wouldn’t pay a Realtor’s comission. The numbers are run using the exit strategy which is the $700,000 sale price which will cost him some commissions because he is the seller.

On this type of investment purchase (flip) there is no way to cash in on that $65,000 you came up with, unless he sells it. This will cause him to pay that profit to a Realtor.

8

With respect to bridge loans, most guidelines call that the house you are leveraging off of (bridging) be on the market prior to closing.

You could certainly take the approach you mentioned.

Regards,

Scott Miller

9

So then I could bridge my existing home, take my equity as cash, never actually move into an investment home and theoretically flip that property and never actually move?

If the guidlines are simply putting my current home on the market I would think a high enough price would buy me a lot of time and never actually sell it correct? Then what, do you just reassume the mortgage on the current home?

I’m sure someones thought of this already and they have guidelines in place to stop it but I’m curious none the less.

10

There’s lots of other factors that haven’t been taken into consideration.

First if you think your home is worth $475k and it will take 6-8 months to sell, then it isn’t really worth $475k. A properly priced home will sell in any market within a month or two. Overpriced or averaged priced homes will stay on the market a lot longer as in your estimate of 6-8 months.

Also any loan that’s over $417k for a single family will be a jumbo mortgage and require higher rates.

I think you need to go out and get actual numbers to figure out whether it’s really worth doing or not. I think once you get them, you’ll realize that it’s not. I believe the bridge loan rate is high enough that even if you decide not to move, there aren’t that many advantages to what you’re planning on doing.

The main kicker won’t be from the bank, it’ll be from your taxes. Living in the property for two years gives you a 500k capital gains tax exemption if married, 250k if not. Otherwise for investment property, it’s your tax rate for short term gains which is under a year and long term over a year is 15%. If you’re just going to flip, then it’s considered inventory and subject to regular tax rates and also 15.3% social security self employment tax plus whatever state taxes you may have.

So you can see, it’s not really the banks that will stop it, it’s the taxes from the government that stops this.

11

Henry,

Thanks so much. I’m obviously not going to do this one but the questions that came up, and I now have answers to, are a huge help.

Interesting to hear you say a month or two for a properly priced home. I was just going by what my realator said at 6-8 months Every comp I have looked at has it in the 475-500 range easy. Maybe he was just giving me a safe time range? I’ll have to ask.

Thanks again for everyones input and feedback. Great site and great forums.

12

If you really want to sell your home quickly, pricing it right will move it quickly. I’ve been to a few open houses where there was just non-stop people going through because the house was probably priced 20-30k below market. In those cases you get a bidding war and sometimes people end up paying over asking. We just had one where our client paid 20k over asking. The house was in great condition, showed well and was probably priced 20-40k below what other properties were selling at.

This doesn’t always work if you’re in a slow period like the winter, but would probably work well in the spring or early fall. It’s 6-8 months if you’re in a slow market and you’ve got it priced liked everyone else.