Cj Johnson a Real Estate Agent in San Diego, wanted to help his friend in Cleveland Ohio who needed funding for a property that she purchased for cash, a year before for $80,000 cash. They purchased the property to be used for a special needs daycare center (special use) real estate asset type.
She used her personal funds to finance a total interior remodel, then demo/gutted the inside of the property, with this being her first project, she was not prepared for the unexpected expenses that presented themselves.
Their rehab ended up costing north of $60,000!
They purchased the property for cash, so the equity should available, right?
In simple terms, yes – but because of these following factors the marketability of a potential loan became more difficult:
- Location of the asset
- Asset type (special use) not just a regular tenant rental, it’s residential used as a business.
- Value of Asset (As-Is value was only $75K) most fix/flip hard money loan minimums are $150k
- Owner/Borrower has 650 Fico, no previous experience flipping homes or land-lording.
- This was a long-term Hold, but lenders who offer long-term financing at reasonable rates will only loan to stable assets, so she needed a two-step solution.
- Gutting the property destroyed the chances of simply cash-out refinancing because the lender immediately required an appraisal inspection!
- Getting a lender to approve the refinance knowing the borrower has no previous history of completing rehabs.
- Getting a lender to approve the loan knowing the borrower has no reserves! They underestimated their rehab and needed the funds to complete the renovation. How will they repay the loan?
- Developing an exit strategy for the fix/flip loan included adding a co-signor, who also needed to be added to the business LLC.
- She applied in the name of the LLC with a very well-known lender, the rate was higher than she preferred, but the points were reasonable and the loan provided the requested cash-out to complete the rehab and reserve 12 months’ worth of interest payments so she didn’t have to worry about that. Everything was going smoothly, the Lender ordered ARV appraisal came in at $160,000! Over the projected!
But following days she received a term sheet with $15,000 unexpected cash to close as a condition? This included points, closing costs, and reserves requirement! The proposed loan amount was $80,000, she was determined she would find the funds somewhere!
Her father stepped up earlier in the process to qualify for the exit loan as a co-borrower, he had a 700+ fico score. To qualify for the 7.5% rate with 30 yr. fixed or 7/1 ARM with 30-day refi seasoning, you need to have a solid 660+ Fico. She decided to use unsecured funding to deposit to their business account to show reserves, she wasn’t happy about paying the fees or the unexpected panic to perform, but reluctantly applied for and received over $90,000 in personal unsecured funding from 6 different vendors.
She was ready to close the loan, then the lender suddenly backed out, saying that the DSCR was just short of qualifying?! The Lender’s team didn’t have their act together, it was a gross error from the underwriting team, and their account rep couldn’t get the exception approved.
It was heart-breaking. Three weeks were spent. Now it’s mid-October, in Ohio they are facing the bitter Mid-West snowy winter, and she can’t afford to slow down on the rehab..
She was blessed to have the cards to take care of expenses, however, because the cards came in her dad’s name, it wasn’t easy to convince them to let the cards go! Her parents feared that she would rack up unsecured debt that she couldn’t pay down, which would ultimately destroy her father’s credit.
She shopped around and located herself another great loan, the Lender agreed to fund her loan.
She used the credit card she received to pay the small application fee, and they announced a closing date. Unfortunately, it took about 3 weeks longer to get it done, meanwhile, she’s getting nervous.
She kept calling the lenders reps to be reassured that the lender would indeed close.
By this point, she was having a stressful situation with the credit cards and her inability to use them.
She remembered her intent and goals and how important they were to her. She remembered that her whole reason for applying for multiple forms of funding is to complete the rehab at any cost!
This was her future business location. And until she completed this rehab, she was losing time & money.
Her strategy was to use her unsecured funds (credit cards) to pay her contractors labor and buy materials and when the refinance goes through, she’d pay the lines of credit off! And she had faith.
Deep down inside she still felt guilty that she brought her parents into it and she wanted to stop altogether! She was very discouraged.
She reminded herself why she started! She was trying to provide a better lifestyle for her family and it required sacrifice from your dad and he stepped up to help his daughter!
She wouldn’t fail him by quitting in the middle of her plan! She’d continue to execute.
Over the next couple weeks waiting in anticipation she racked up some hefty invoices from her contractor and was prepared to pay them via her unsecured credit when BOOM suddenly “Clear to Close” came across her email, with loan documents for review and signing to be completed a few days later!
- The process taught her a lot about financing, she learned how to qualify for fix/flip and buy/hold loans, as well as unsecured funding.
- She had her father add her as an authorized user on all of the trade lines, so now she’ll get her own cards for easy access, she’ll build her credit score through positive history (piggy-backing) and paying all of the lines down again!
- She received $90k unsecured financing in 3 weeks, then $75,000 3-4 weeks later @ 12% for 12 months, she received a lump sum at the table, and she has submitted a couple draws already for reimbursement. You complete the work – submit an invoice after you (take before /after pictures), then the 3rd party company reviews, approves and wires the money to your business account in 24-48 hrs.
- She now has 6 trade lines that added $90k to her ratios, and if she keeps utilization down under 30%-40% it’ll raise her score to 700+ also with another mortgage trade line, she would be soon staring at an 800+ fico score!
- Because we added her dad to the LLC, we focused next on helping them create a strong business profile with multiple business lines of credit of $200k-$500k over the next 12 months. These lines will allow them 100% access to borrowing down on the lines without affecting their business credit rating! She can open another daycare center within 24 months, or flip some properties in the area (if they choose).
- Finally, since she’s been working on the property the whole time, she estimates being complete with the rehab in 60 days immediately applying for the refinance into the 30-yr. fixed. The lender has already reviewed her property details, personal credit and financials and pre-approved them, additionally since the 1st payment isn’t due for 2 months for the current loan, she has a great chance to only make 1-2 payments at 12%.
In the end, she utilized multiple rounds of funding to complete her rehab.