Analysis of a Hard Money Loan Deal
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”.
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