Analysis of a Hard Money Loan Deal

Analysis of a hard money loans dea

Analysis of a hard money loans deal

A real estate investor submitted the following hard money loan deal for consideration:

  • Residential single family house, 3 bedroom, 2 bathroom, built in 2003, bank owned foreclosure (REO)
  • After repaired value (ARV) = $65,000
  • Estimated repairs = $5,000
  • The real estate investor intends to offer $40,000

I don’t have to run the numbers to tell that this deal is too thin and that the real estate investor should offer a lot less on this REO property.

A quick check of the recent comparable sales (comps) in the MLS indicated that his estimated ARV (future market value) of $65,000 was a valid number.  There are houses currently listed for sale in the $110k-$120k range, but the only properties that have sold in the past 6 months were foreclosures which brings the ARV down.

I assumed that it would take the real estate investor 6 months to turn the property around from the time he purchased the property, completed the renovations, found a buyer, and got the deal closed.

Estimated Sales Price

$65,000

Purchase Price

-$40,000

Rehab Costs

-$5,000

Loan Origination Fee

-$4,000

Closing Costs (buy)

-$1,500

Holding Costs (interest $42k @ 15%, $525 month x 6 m)

-$3,150

Holding Costs (taxes @ $1,700/yr, $142/m x 6 m)

-$852

Holding Costs (utilities, maintenance, yard, $50/m x 6 m)

-$300

RE Commission (sell, est 6%)

-$3,900

Closing Costs (sell, est)

-$2,500

Total Purchase, Rehab, Holding, Selling Costs

$61,202

Estimated Net Profit

$3,798

That’s a pretty skinny deal.  The RE investor has no margin for error here and it’s a lot of time, money, and effort for very little profit and a lot of risk.  Could the investor sell the house for more than $65k? Maybe, but in the absence of any recent comparable sales to justify a higher sales price, you can’t basis your analysis on the hope that you’ll get a higher sales price.  Could the house sell in less than 6 months?  Sure, but the average days on market (DOM) in the area is  about 70 days, add in 2 to 4 weeks for the rehab, and 30 to 60 days for the buyer to get financing and you are at 4-5 months from start to finish.

The only way for this deal to make sense, is for the real estate investor to acquire the property at a much lower price.  As the saying goes, “you make your money when you buy, you get paid when you sell”.