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How Are Investors Using Construction Loans to Acquire Properties with Hard Money
1. an acquisition loan
Let’s just say it’s a three bedroom one bath home and your goal is to add a thousand square feet and convert it to a four bedroom three bath home. So obviously, when you go to purchase it the plans aren’t approved so we can’t use the future value, we have to just go off of the acquisition. So what we’ve come up with is a first and second loan.
1st loan – Acquisition Loan
- helps you close on the property
- usually we’ll go to about 80% of the purchase price, you come in with 20% and closing costs
- we’ll need three to six months of debt service to pay the mortgage payment as you’re getting the property entitled or the plans approved.
2nd loan – Construction Loan
- once the plans are approved we’ll put a second deed of trust—we’ll put a second mortgage there
Having this combination is now letting investors who were just routinely doing what we used to call lipstick jobs—just cosmetic flips
Being able to work with a fund like ours enables you to have the opportunities to be able to structure these deals
- people do longer escrow periods
- meaning, you’ll go on a contract on a property but you don’t close until the plans are approved or submitted
- that means it could be a 90 or 120 day escrow
Why would a seller want to do a longer escrow period?
You can sometimes pay them a little bit more money for the patience, and so it’s a win/win situation. So learning these deal structuring formulas is essential, and working with a good hard money lender—like our company—we have three separate funds and I also work with several other funds if you don’t fit into our box at our company