Re: Paying the Hard Money Lender… - Posted by Jim Kennedy - Houston, TX
Posted by Jim Kennedy - Houston, TX on January 28, 2002 at 08:55:08:
Here are a few suggestions.
Based on the numbers in your example, you’ve got a very healthy potential profit.
$30K purchase price + $20K in repairs = $50K spread.
Now deduct a figure for soft costs, i.e. acquisition costs, holding costs, and disposition costs. Figure $12K since you’ll have to include the agent’s commission.
$50K spread - $12K in soft costs = $38K potential profit.
There’s an old saying that goes something like: “Price cures all ills related to real estate.” Since you’ve got plenty of room in this particular deal, consider dropping the asking price for a quick sale. Would you be happy with a $28K profit? I would. How about $25K or even $20K? Those sound like reasonable profit margins to me. Brings to mind another saying. “Pigs get fed, but hogs get slaughtered.”
Not every rehab is going to have such a generous profit potential as your example. In fact, I average about 20% on most of my rehabs. Therefore, dropping the ask price is not always going to be the most attractive option. So here are a few more suggestions.
Your question seems to concern a hypothetical scenario as opposed to an actual existing deal. If that’s the case, find a hard money lender that will go longer than six months. In my area, there are several that go twelve months. While six months should be enough time, why put yourself in a potential bind? The rehab phase could go longer than expected. And the marketing phase is even more unpredictable. Give yourself the extra time to be on the safe side.
If your question concerns an actual existing deal, there are a couple of ways to solve the problem. As you mentioned, a bank refi is one solution. In the construction business, this is referred to as “take out” financing. Another solution is to bring in a money partner to pay off the hard money lender. This could be costly since the money partner will generally want a pretty hefty piece of the pie. But it’s better to give up a portion of the profit than to lose the whole deal.
Here’s a suggestion that’s pure speculation on my part. I have no idea if it would work, but it’s certainly worth a try. Renegotiate with the hard money lender. Offer additional incentive, i.e. another point or two, a higher interest rate, or a combination, in return for an extension.
My last suggestion concerns the agent. From your post, I take it that the six months you mentioned was from the date that the loan was funded until the due date. If that’s the case, I’m going to assume that the house has been on the market for 4½ to 5 months. A $20K rehab shouldn’t take but about 4 to 6 weeks at the most, weather permitting. Depending on local market conditions, I’d be real concerned with an agent that couldn’t get the home sold any faster than that. Consider firing the agent. This won’t help solve the immediate problem of the impending due date, but at least you won’t be paying six or seven percent to someone who hasn’t performed satisfactorily.
Hope this has been of some help.
Best of Success!!