Bridge 2nd MTG for down pmt on new rehab? - Posted by Chris-OH

Posted by Chris-OH on April 15, 2006 at 23:28:59:

Those are the two exact peoeple from whom I desired responses. Thanks, John & Ed. John-no further questions at this time…thanks for the info re: the 1031.
Ed-quick follow up queston regarding the release clause. I need to request this from the potential lender, in the event I sell this property prior to closing on property #2? Is that correct?
Thanks, again guys!

Bridge 2nd MTG for down pmt on new rehab? - Posted by Chris-OH

Posted by Chris-OH on April 15, 2006 at 01:25:09:

Here’s a question for our resident financial experts.
I have a SF residence I bought from HUD for $56K. Found mtg broker on this site who shall remain nameless to prevent advertisement, but he knows who he is. I have put approx $12K into rehab. Comps selling in the upper 80’s-low 90’s. I have plenty of profit & equity potential from this and it will be market-ready in< 2 weeks. I came across another beauty & have it locked in contract…a totally gutted & partially rehabbed duplex. All mechanicals finished, what remains to be done is insulation, drywall & the rest (all bath fixutres, etc) Purch price (get this) $39K, approx rehab costs $35-38K. ARV to be at least $120K. A local bank is offering a purchase & construction loan, interest only for 12 months, with 3 construction draws throughout rehab. I can of course do a cash-out re-fi after rehab. They want 15-20% down for this package, and are wanting to put a 2nd on my existing rehab property for the down payment. Is this the best way for me to finance this new project, and will this qualify me for a 1031 exchange, even though property #1 is a SFR, and the other is a duplex?

Re: Bridge 2nd MTG for down pmt on new rehab? - Posted by Ed Garcia

Posted by Ed Garcia on April 15, 2006 at 11:36:45:


John Corey did an excellent job of explaining the 1031 exchange aspect of your question.

I not only like the way you can do the deal with the bank, but encourage it since this is the best way for you to do “short term financing”. It allows you to do the second deal with no out lay of cash and at the same time will help you establish a stronger relationship with the bank for future deals.

When doing your cross collateralization loan, don?t forget to get a release clause on the house, which will give you flexibility in the event you should sell prior to paying off your loan with the bank. The bank will give you a release clause based on them receiving the initial down that they originally would have required.

Ed Garcia

Re: Bridge 2nd MTG for down pmt on new rehab? - Posted by John Corey

Posted by John Corey on April 15, 2006 at 08:31:04:


  1. It is one way of financing. It is likely that not a lot of other lenders will work with a property that has not seasoned much. If you are going to sell it the costs of a new loan on the 1st does not make that much sense. Also if the property is being put on the market many lenders will not make the loan if it is listed.

You also could benefit from doing a few deals with the bank. Hence taking up their offer might have benefits beyond this deal.

  1. The 1031 question needs attention.

It is unlikely you can do a 1031 is you do not quickly connect with a facilitator who will manage the process. You need to be careful about the sale, the purchase and how the details are handled or the 1031 will be null.

It does not matter what you are selling and what you are buying as long as it is RE. It could be a city office building for a residence and then a lot and then a shopping mall. What matters are the numbers (value, equity, debt) and if there was any cash received.

More important is the fact that the property you expect to sell you did not hold for investment purposes. A simple test is it was never a rental. You purchased it for a short term hold (buy, fix, resell). Hence the IRS generally excludes all such deals from the 1031 process. They see such deals as property held for inventory (to resell) and not as a long term investment. The fine details might be slightly different. The key is you are unlikely to be able to do a 1031.

John Corey