Good credit, cash on hand, need creative financing options?

[Katobie129]

This is a spin off from a previous question about owner financing a property.

2400 sq foot 1946 brick house on 32 acres of rural land, asking $345K/as is, no disclosures (non-owner occupied), seller financing available.  We know for sure it needs foundation work (significant...likely lifting the house and re-doing most of the foundation), roof repair (but not replace), insulation and likely some plumbing/electrical work done.  We will be going back with our GC for more specific numbers within the next week or two, but he said we're looking at likely close to $125K of work (which included some optional room reconfiguring).  The house will NOT pass an inspection in it's current condition for conventional financing.  It appears with all repairs completed, it should appraise maybe around $360K...rough estimate.  Also, I am a veteran with a current VA mortgage with with full entitlement to be restored after current house sells.  The price is for the entire 32 acres, which consists of the house on just under 5 acres and a separate parcel of land with several outbuildings (large quonset hut, older barn that needs work) on about 26 acres.

I have low 700's credit scores (greatly influenced by high DTI that won't be an issue then), 2 houses for sale right now, I should have about $125K in hand after both houses are sold and be basically debt free.  My income is $76K/yr, stable job.

Besides short term owner financing to make the repairs and then refinancing to a conventional mortgage, does anyone have any other creative financing ideas?  Considering subdividing along current parcel lines, paying cash for the land and then renovation mortgage for the house w/5 acres.  Or does anyone have any experience with agricultural loans?  I don't think I'm too interested in hard money loans just because of the interest rates, but open to other ideas. 

Thanks in advance!

[StartingOver10]

IMO it makes more sense for you to have the seller hold a mortgage on the land too to preserve the cash you have for the renovation costs.

How did you come up to the fully renovated value?  Appraisal on the house and 5 ac only? 

There are renovation type mortgages available that are conventional loans and not FHA loans. You still have to get bids and a GC to do the work and the payments to subs are made on a draw system.  When you are finished with the work it automatically becomes a permanent mortgage.

 Are the terms the seller is willing to take on the owner financing more favorable than the renovation loan or haven't you checked into it yet?

[Katobie129]

This property has been brutal to figure any comps on at all, but.....using just some rough ideas....   I found at least 2 houses within the basic geographic range, size, year built, etc.  One sold for $165K and one for $185K, but neither required any renovations and each on about an acre, give or take a tenth.  Taking an average of that, I went with $175K for the house on 1 acre as the renovated value.   I priced the remaining land at $3500/acre which is about the going rate, possibly even a little high, to get $105K for the  rest of the land the house is not sitting on.  The outbuildings are (1) a 30x60 foot uninsulated qunoset hut with a cement floor, wired and water (2) a 50 x 60 foot 10 stall horse barn with water and electricity that will require a LOT of work if one wanted horses...as a man cave/hunting lodge it's ok...doubt electric or water actually safe or useful (3) there's a 16 x 16 conder block open sided building with water and electricity   (4) a one car detached brick garage with limited value: roof leaks, foundation is cracked (5) several run in sheds on fenced pastures,  (6) there are 3 newer cement foundations that look like they may have been for pole barns or possibly giant chicken coops...water run to these, don't appear to have been used, and in perfect shape and then (7) two well houses on different parts of the property, one in good shape, one not. So I came up with a total of about $80K for the outbuildings.  Adding all of that came to about $360 for the land, renovated house and outbuildings.

We haven't really talked about terms with the seller yet.  We think at $345K he's a bit high.  Entire property last sold by him to previous owner financed buyer in November, 2010 for $310K, and that owner financing fell through.  We do know from his agent that he would require a 20% downpayment.

My thinking was to offer $180K for 30 acres + buildings using owner financing.  This would requires $36K of my available cash.  Then using bank financing (such as a renovation loan) offer $125K for the house.....would require another $25K of my available cash.   So I'd be left with about $65K of my cash on hand.  Total purchase price of the entire parcel would be $305K, just in two transactions...one bank financed, one owner financed.

The seller would finance the land portion but get $36K from me right at the start.  The bank finances house + renovations and the seller gets the additional $125K.  So doing this would put $160K-ish into the seller's hand right from the start.

The part that gets tricky is how much could I finance on the house for the renovations.  If I buy it at $125K with $25K downpayment, I have a $100K mortgage.  I don't know if I could finance enough to cover the renovations, or if there's another way to finance the house/1 acre for something close to $220K to cover purchase of the house and $125K in renovations? I'd prefer to keep as much of my cash on hand as possible for any unanticipated over-runs.

Thanks!

[Katobie129]

Ooops, forgot....my buyer's agent has already briefly mentioned that we'd be looking for VERY close to market terms on the owner financing.   We have some questions about the listing agent's integrity......I believe the listing agent is related to the seller, and there was some information told to us that did not check out with further examination about the foundation work. 

The financing issues on this property are related to the PROPERTY, not to my ability to perform as a buyer. If the house would pass inspection, I could finance it all day long.  But in it's current condition and given the total amount of acreage, a conventional mortgage will be just about impossible.

Thanks again!

[StartingOver10]

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@Katobie129 wrote:

Ooops, forgot....my buyer's agent has already briefly mentioned that we'd be looking for VERY close to market terms on the owner financing.   We have some questions about the listing agent's integrity......I believe the listing agent is related to the seller, and there was some information told to us that did not check out with further examination about the foundation work. 

The financing issues on this property are related to the PROPERTY, not to my ability to perform as a buyer. If the house would pass inspection, I could finance it all day long.  But in it's current condition and given the total amount of acreage, a conventional mortgage will be just about impossible.

Thanks again!

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It sounded all along like property issues and not your issues for financing from the posts you have made here and on the appraisersforum.com website (I think it is you asking about how many adjustments can be made to comps - the property sounds similar).

Those conventional renovation loans are perfect for your situation.  Not for the surrounding land of course, but the house on the small parcel (5 ac, right?).  The whole point to a renovation type loan is that the ultimate value, with the renovations will be higher than the current value and the purchase is one part of the loan and the renovations will add value.  Naturally you need two appraisals for this:  1) AS IS and the other 2) As renovated.  Use an experienced lender that does these all the time as it can get complicated.

Have you talked with a lender about a conventional renovation loan?  I ask because usually in rural areas the thing that makes it difficult is the land size, but in this particular situation you have that handled already by having the house on a small parcel and the rest of the land is contiguous but not part of the same purchase.  It can be handled with two different purchase contracts that have a clause that they will close simultaneously. Have an attorney prepare that part of the contract - or actually prepare all of the contract including the seller financing portion of the land.

It is common that the seller gets close to his asking price for the land only if it is anywhere near market for offering terms rather than requiring the cash or outside financing at closing. But who's to say that the land is worth $3500/ac? It could be less. This would be another opportunity for an appraisal.  

There is an old real estate saying:  Your price, my terms or my price, your terms. Remember, when you are negotiating this sale you might consider negotiating subject to the appraisal (I would) on the land and the appraisal on the house.  You are doing this seller a huge favor. Not many buyers have the vision to see the property when it needs extensive renovations and even fewer have the resources and aptitude to get it done.