Author Topic: Options for Distressed Properties without 100% cash  (Read 2259 times)

Axecleaver

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Options for Distressed Properties without 100% cash
« on: July 02, 2015, 08:48:05 AM »
My wife and I are newly minted empty nesters, with our girl going to college in September. I listed our property on Zillow's Make Me Move at 300k (we had failed to sell for 350k a year earlier) and within three days we had a contract for full list price, closing at the end of August. I am looking at an August, 2020 FIRE date, which gives us another 5 years in the area. My wife and I would like to buy a distressed property in the 60-100k range, live there and fix it up, then turn it into a rental property.

Most distressed properties that we've looked at cannot secure financing - no kitchen or maybe they're missing a furnace. They're listed as "100% cash deals only" to get around this. We have 20k to put down but we'd prefer not to wait until we have 100% cash available. Looking for alternate options that let us move forward with less than 100% down. My thoughts:

- A rent to own deal where we put 5% down, pay rent and agree to purchase the home within 2 years. We make improvements at our own cost until it's "finance-able" then get a loan for 80%. I'm not clear on the risks for a deal like this but they seem substantial.

- Find sellers that are willing to hold our note; tough since most people selling these properties are looking to get out of them and selling below market. We looked at an 80k property with an ARV of 160k this morning, which got an all-cash offer for list, 5 minutes after we walked in. Had been on the market for 3 days.

Any other options for a deal like this? We're handy people very excited to be ditching our $3100 mortgage payment and start building a passive income stream over the next five years. Thanks!

ShoulderThingThatGoesUp

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Re: Options for Distressed Properties without 100% cash
« Reply #1 on: July 02, 2015, 08:55:56 AM »
Do it someplace less expensive than New York, where a distressed property costs less?

arebelspy

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Re: Options for Distressed Properties without 100% cash
« Reply #2 on: July 02, 2015, 09:34:52 AM »
Are you going to get much equity from your current place?
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babysteps

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Re: Options for Distressed Properties without 100% cash
« Reply #3 on: July 02, 2015, 09:53:30 AM »
... I am looking at an August, 2020 FIRE date, which gives us another 5 years in the area.
...We have 20k to put down but we'd prefer not to wait until we have 100% cash available
....We're handy people very excited to be ditching our $3100 mortgage payment and start building a passive income stream over the next five years. Thanks!

I am guessing that if you are targeting 2020 for FIRE date, then you have more than $20,000 available in savings and/or investments that you could use for a house purchase? 

If you bought the $80k house with $160 ARV, I am making an assumption of $40k in fix-up costs, and then sold after 5 yrs for $160k, toss in taxes at ??8k??/yr, you would have functionally lived there for free for 5 yrs (costs=80+40+40 or 160; sale price is 160) - ok, I am ignoring transaction costs and post-fix-up maintenance and likely much else, and you may want to turn it into a rental after you move someplace that costs less, but you get the idea. 

Compare that scenario against renting to help decide if it's ok to liquidate some of your 'stache to buy a distressed property outright.  Otherwise, maybe a functional 'ugly duckling' is a better way to go given your budget and skills.

There are hard money lenders that finance wrecks, but unless you are going to flip a property (and even then...) that really doesn't make sense imo.

jooles

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Re: Options for Distressed Properties without 100% cash
« Reply #4 on: July 02, 2015, 10:44:34 AM »
Hard money lender = lenders who charge significantly more for the loan than a mortgage

Hard money lenders are a possible option for this type of a purchase even if it is for your personal living situation IF --

you can rehab the home quickly in order to qualify for conventional financing
you are able to personally qualify for conventional mortgage financing

THEN your plan becomes

borrow from the hard money lender to purchase
quickly fix the property
quickly secure a mortgage and immediately pay off the hard money lender

There is plenty of cost in this scenario and plenty of risk too, but it can be done.

Axecleaver

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Re: Options for Distressed Properties without 100% cash
« Reply #5 on: July 02, 2015, 11:05:56 AM »
Thanks, guys - this is the info I was looking for.

Quote
Do it someplace less expensive than New York, where a distressed property costs less?
Fair point, but my work situation keeps us in the Albany area for the next five years. The taxes and overall HCOL is a drag, but I've got a sweet work situation that balances that out.

Quote
Are you going to get much equity from your current place?
No. It's assessed for 360k, we owe 270k. I agreed to a 3% buyer's commission when their agent brought me the buyer. With closing costs, looking at walking away with about $15-20k.

Quote
you have more than $20,000 available in savings and/or investments that you could use for a house purchase? 
Our retirement funds are in a Solo 401k which does not permit hardship withdrawals for home purchase. We have $20k in our emergency fund, and are generating about 10k a month in savings. If I wait until after closing, we will have ~60k. Maybe a short-term rental to keep us out of the rain for a month or two while we find a property would work.

Quote
Hard money lenders are a possible option for this type of a purchase even if it is for your personal living situation IF --

you can rehab the home quickly in order to qualify for conventional financing
you are able to personally qualify for conventional mortgage financing

THEN your plan becomes

borrow from the hard money lender to purchase
quickly fix the property
quickly secure a mortgage and immediately pay off the hard money lender

I'm going to look into this, thanks! Any suggestions on where to start? I'm going to poke around on biggerpockets first.

arebelspy

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Re: Options for Distressed Properties without 100% cash
« Reply #6 on: July 02, 2015, 12:13:53 PM »
Our retirement funds are in a Solo 401k which does not permit hardship withdrawals for home purchase. We have $20k in our emergency fund, and are generating about 10k a month in savings. If I wait until after closing, we will have ~60k. Maybe a short-term rental to keep us out of the rain for a month or two while we find a property would work.

That's the best plan.  Rent until you get the money you need.

Hard money when you're hard up for money is a BAD idea.  Super high interest rate, and what happens if the loan reaches maturity and you can't get financing or pay it off?  You lose the property.  The worst case scenario is really bad, especially in your situation.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Axecleaver

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Re: Options for Distressed Properties without 100% cash
« Reply #7 on: July 03, 2015, 08:32:28 AM »
Looked into it yesterday and the hard money origination fees seem to be where you take a beating. Five points for a six month loan is expensive! Learned something and we've decided to rent month to month and take our time finding the property we want, renovate enough to move in, and finish it off in a year or two. We're thinking of watching the Homepath website for Fannie Mae foreclosures. The 20 day first look seems like an incredible advantage, and all it requires is that you owner-occupy and live there for a year, which we had planned to do anyway.

I searched the MMM forums for "Homepath" and found a lot of mixed experiences - not a lot of success stories - any tips on working with Homepath properties? There appear to be a few listed in my city that seem too good to be true - a 3br property that sold for 120k in 2007, in the University rental district where it would generate 1500-1800 a month in rents, for 23k + 20-30k reno costs. Doubtless there are some problems we'd find if we looked, but those numbers leave a lot of margin for error.

ohana

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Re: Options for Distressed Properties without 100% cash
« Reply #8 on: July 03, 2015, 08:39:16 AM »
So what if you did Prosper or Lending Club?  If both of you took loans, you could probably do it.

However, don't underestimate how much money it's going to take to rehab a place up to the level where you can go with a regular lender.  This sounds like a risky move on your part.  I wouldn't do it without an emergency fund set aside.

Good luck!