In 2001, we decided that we wanted to buy a fixer and flip it (resell it) when we were done. We knew that the properties that we were interested in could not be financed because of their condition. Banks won’t lend on something in critical condition. Our plan was to find a seller that would sell the house on contract and use the equity line from our home as the source of cash.
It took awhile to find the “perfect” house. Once we did, we negotiated the terms of the contract with the seller. They wanted a two-year repayment penalty and we wanted to put less cash down. We agreed to pay a higher interest rate in return. We wrote a check off the equity line for the down payment. We used an independent escrow company for payments. We made our monthly payment to the company and they distributed the funds to the seller and the seller’s mortgage company (they had an assumable loan which is unusual). For the small fee, having a third party as an intermediattory was well worth it. We paid the setup fees.
Throughout the project, we paid our bills from the equity line. Soon the monthly equity line payment was approaching the size of our monthly payment to the seller. We also realized (a little late (we would have painted white throughout rather than custom colors)) that we needed to keep the house and not resell it because we had spent so much on the remodel. We figured, correctly, that the neighborhood was going to improve around us and we would ride the value of the neighborhood. Just recently the house next door, that was red tagged (uninhabitable) by the City in 1998 started to get a major face lift.
When we went to refinance the property to pay off the seller and our equity line we were met with one more surprise: with the refinance of an investment property, we could only take out 70% of the equity, not the traditional 80%. We knew going in that it was not going to be an easy project. We were buying someone else’s remodel project. They has started without permits. We permitted what they had done (most of it without too much difficulty but I don’t know that I would do it again) and did the rest of the project with the required permits. We ived through what everybody already knows: this sort of project takes longer and costs more than you plan.