Posted by Ed Garcia on January 08, 2001 at 10:18:58:
You don’t tell us any thing about you or your circumstances. Meaning, Income, credit, cash available for down payment, if you have other property we can borrow against or cross collateralize with, etc? You mention that the repairs are cosmetic, but don’t actually give us a ballpark of how much? Cosmetic can be $2000 to $10,000. You don’t tell us what it’s going to cost to get the lots approved, and how lone it will take to subdivide the lots?
We don’t even know if you’ve done your home work and know for sure if the lots can be subdivided, or if it’s just a assumption on your part, because you see the lots as the upside of the deal. I’ve seen the city or county say NO before.
DFG, you can purchase a house today with only 5% of you own money and a seller carry back for the down, on a none owner occupied, or you can buy it with just 10% down. Since you don’t mention your credit and keep talking about Hard Money at 65% LTV, I’m going to have to assume that your credit is bad, or for whatever reason, you don’t qualify for a loan. You’ve got me doing what I don’t like to do, and that’s assume, and talk hypothetical.
Chances are that if the house appraised for $230,000 the lot size has already been taken into consideration with an adjustment for lot size to the comparables. So I would use that piece of information to get the seller back to $230,000. Most buyers who would buy the house, would buy it to live in it, and would not pay over appraised price.
Here’s what I would do.
I’d tie up the property at $230,000 after making my argument that I’m basing my offer on an existing appraisal that they all ready have, and that no lender is going to finance you for more than that. I’ve done a deal where I walked my subdivision through while I was in escrow. But because your buyer wants to purchase another house I don’t think he’ll give you the time.
I’d go down to the planning department and find out for a fact, what it would take to subdivide the lots, and approximately how long?
I’d ask the carpenter friend who has committed to do the work exclusively, if he would like to be my partner. (Don’t ask me why, but I think you’ve already done that, and the contractor has credit problems as well) If’ I’m right in my assumption, then I’d find a partner with good credit.
A long shot, is to make the seller your partner, and have the him re-finance his house to the maximum. He can get at least 80% cash out. 80% of $230,000 is $184,000. That could buy time to fix up the house, subdivide the lots and sell it all off.
Personally. I’d look to do this deal in a different way. The reason is because when you fix up the house, you say it will be worth $290,000. If you put it on the market for $290,000, you more than likely will get an offer between $280,000 and $285,000. Lets say you sold it for $285,000 after paying 6% commission; you’re now down to $267,900. I don’t know what it’s going to cost you in fix ups, so lets say about $7000; you’re now down to $260,900. Lets throw out LTV and pretend that you got a 100% financing. Lets say that you financed $255,000 at 10% and 2 points. Your loan cost is approximately $7100. You’re now down to $253,800. At the same token you are now debt servicing the loan, and the loan payment is $2125, not counting taxes and insurance. You tell us you can rent it, but again, you don’t say for how much? I could go on and on but I think you can see where I’m going. You’re definitely going to have some holding cost.
DFG, the value of doing this deal is the lots. I would go to the seller and tell him that you would like to buy the lot. Tell him that you will give him $35,000 just for the lot. Tell him you will walk it through City Hall to get it approved, to split it from the house and will absorb the cost. Tell him that he will be able to make an additional $35,000 over the sale of the house. He can carry you for the $35,000 in first position on the lots until you sell them.
DFG, you will have no out of pocket money except for cost to subdivide the lots, which you were going to encounter any way. The only debt service you’re going to have, will by the payments on the $35,000 loan that is on the lots. You won’t have any real closing cost, compared to if you would have purchased the house, and what a difference in holding cost or debt service.
I hope my post has given you some food for thought,