Loan Request for Single-Family Residential Reconstruction
November 18, 20xx
Jonathan Reynolds
847 Market Street
Chicago, Illinois
Telephone 312-555-7896
Table of Contents
Introduction...............................................................................................................................................3
Market Value of the House on Completion.............................................................................3
Terms of the Expected Sale................................................................................................................4
Title to the Property..............................................................................................................................4
Costs to Remodel the Property.......................................................................................................4
Sales Price....................................................................................................................................................7
Cash Flow....................................................................................................................................................7
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Introduction
This is a request for a loan of $30,000 for the purpose of improving a single-
family residence at 2246½ Hamilton Street, Chicago, Illinois. This house has been
condemned by the city because of faulty plumbing and wiring, and because it has
been unoccupied for about three years. As a result, there is substantial work to be
completed before the house can be legally and profitably sold. According to city
inspectors and a private structural engineer, the house is basically sound, except
for the items referred to. Specifically, the city has stated it will issue an occupancy
certificate once the tagged items are completed to its satisfaction.
Upon completion, the house will have a market value of $120,000, based on
comparable sales in the area. Since I have acquired the house for $60,000, the
proceeds from the sale of the house will be more than enough to pay the existing
note on the house and to pay back the new loan.
Market Value of the House on Completion
Comparable Values
Address Sold For Sq. Ft. Features Age $/Sq. Ft.
2357 7th St. $119,000 1,385 3 br, 1 ba 50+ 85.92
406 Bean Ave. $125,000 1,500 3 br, 2 ba 45+ 83.33
2765 9th St. (This house was $75,000 1,200 2 br, 1 ba 50+ 62.50
condemned also)
567 Bacon Ave. (This house $50,000 1,400 3 br, 2 ba 60+ 35.71
was condemned; the developer
thinks he will sell it for $130,000
upon completion of work)
1988 7th St. (This house just sold $135,000 1,450 3 br, 2 ba 40+ 93.10
after being fixed up)
Although I have not yet acquired a formal appraisal of the value of the house, a study
of recent sales of comparable property in the area supports the value of $120,000. This
area of Chicago is undergoing gentrification, as younger, upwardly mobile families are
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buying older houses and fixing them up to live in or resell. People in the market appear
to be willing to pay a premium for a rebuilt house, both in terms of selling price overall
and on a square-foot basis. An appraisal can be obtained from any number of qualified
appraisers at the lender’s request.
Terms of the Expected Sale
Lenders in this neighborhood have been lending 80% of the appraised value of a first
mortgage. Buyers normally expect to make a down payment of 10% to 15% of the
selling price. Many sellers are willing to carry a second mortgage on the houses for
up to 10% of the selling price. This loan request is based on that set of assumptions
about the terms of the resale.
Title to the Property
As evidenced by the preliminary title reports and policy of title insurance issued
to me by Chicago Title Insurance, I presently own the property. The escrow closed
on October 3, 2013 at the Third National Bank. A copy of the escrow documents
and title policy are available upon request. I bought the property for a total price of
$60,000, by making a down payment of $5,000 in cash with the seller, Mr. and Mrs.
Timothy Jones of 2336 South Whale Drive in Joliet, agreeing to carry back a $55,000
mortgage on the property. The mortgage calls for monthly payments of $800 until
October 3, 2014, one year from the close of escrow, when the entire remaining
amount of $52,500 becomes due and payable.
Costs to Remodel the Property
As previously discussed, the house needs new plumbing and wiring, a new roof, and
other repairs, including replacing most of the windows, refinishing the floors, and
making improvements to the kitchen to make it marketable for the $120,000 value.
I plan to have the electrical and plumbing, floor, roof, and kitchen work done by
licensed subcontractors and to do most of the additional cosmetic work myself.
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Here is a summary of the low bids I have received so far to the portion of the work
to be completed by outside contractors. Copies of the bids are available on request.
Plumbing: Install new water and gas pipe, install new water heater, use
existing sinks and tub, but install new faucets and toilet
Low bid from Smith Brothers, 114 Prince William St., Gary, Indiana $ 12,998
Electrical: Pull new wiring throughout, install good quality fixtures and
outlets, using existing boxes and wall holes wherever possible, all to code
Frank Rochioloi, Chicago, lllinois 4,006
Roof: Install four-ply roof over entire house with 20-year guarantee, to code
Johnson Roofing, Chicago, Illinois 800
Flooring and Carpeting: Repair flooring and install new wall-to-wall
carpeting and/or linoleum throughout
Acme Floors, Chicago, Illinois 4,958
Kitchen Cabinets: Build and install new cabinets in kitchen
Urizola Cabinets, Chicago, Illinois 1,995
Range and Refrigerator:
Gordon’s Appliances, Chicago, Illinois 1,398
Total Bid Items $ 26,155
I plan to do some of the cosmetic work myself during the three months’
construction time. That work will include painting inside and out, replacing
window glass, and other miscellaneous items as the need arises. Cost of materials
for those items will be about $500. Building permits and fees for the electrical,
plumbing, and roof work will add another $500. This will put the total costs,
excluding finance costs, at $78,155. As seen on the project Profit and Loss
Forecast that follows, I have estimated financing and other costs to total an
additional $10,200.
In making my financial projections, I made the following assumptions:
• The house will be sold within six months of the start of construction, and the
Joneses’ note will then be paid off. (The interest portion of this $800 note is $550.)
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• Costs of the new loan of $30,000 secured by a second mortgage are assumed
to be two points, which amounts to a $600 loan origination fee.
• Interest is assumed to be at a 12% annual rate, for a six-month total interest
cost of $1,800 for that loan.
• Finally, I assume that I shall pay myself a salary of $1,500 per month during the
time I actually work on the house.
Profit and Loss Forecast for the Remodeling and Resale of Single-
Family Residential House at 2246½ Hamilton St., Chicago
Item Amount
Sales price $ 120,000
Less: 6% Commission 7,200
Net Proceeds 112,800
Less: Cost to acquire house 60,000
Plumbing 12,998
Electrical 4,006
Roof 800
Flooring and carpeting 4,958
Kitchen cabinets 1,995
Range and refrigerator 1,398
Miscellaneous supplies 500
Building permit, city fees 500
Subtotal Costs 78,155
Carrying costs, 6 months—interest on mortgage 3,300
Interest and loan fees on new loan, 6 months 2,400
Developer overhead (3 months’ living expense at $1,500) 4,500
Total Project Cost 88,355
Project Profit $ 24,445
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Sales Price
The sales price of the 2246½ Hamilton Street house, after remodeling, is forecast
to be $120,000, with a 6% real estate commission paid in cash from the proceeds
of the sale. We expect to carry back a new second mortgage in favor of the buyer
of approximately $12,000, which means the seller will pay a cash down payment
of $12,000 and obtain a new first mortgage of $96,000 from a bank or savings and
loan. The new first mortgage will pay off the existing first and second loans on the
property. Thus, at the conclusion of the transaction, I expect to receive the cash
difference between the total of all outstanding loan balances, sales commissions,
and other cash expenses. In addition, I shall have a second mortgage on the
property in the amount of $12,000.
Cash Flow
As seen on the attached cash flow for this project, there are only three infusions
of cash into the project. The first one is the money from my savings account with
which I made the down payment on the property and with which I obtained the
engineering studies that convinced me that the project will make money. The
second infusion will be the proceeds from the loan being applied for here. The third
and final infusion will be from the sale of the property, and that will be sufficient
to pay off the other loans on the project and leave a cash profit of $12,445. The
difference between the cash profit and the book profit shown earlier is accounted
for by the $12,000 second mortgage I’ll carry in favor of the buyer.
Based on demand for housing in the subject area, I believe that the house will
probably sell far more quickly than I have forecast; in fact, I have already had two
inquiries about selling it. Based on my experience with remodeling houses of this age
and location, I am sure that the $30,000 requested will be adequate to complete the
repairs necessary to increase the value of the house.
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Project Development Cash Flow—Remodel House at 2246½ Hamilton
Construction Period
Pre- Month Month Month Month Month Month Total House
Const 1 2 3 4 5 6 Cost Sale
Sources of Cash
Savings 5,300
New second 30,000
Sales—down payment 12,000
New first 96,000
Total Sources 5,300 30,000 108,000
Uses of Cash: Preconstruction
Down payment to buy house 5,000
City inspection fee 100
Engineer consultant 200
Total Preconstruction 5,300
Uses of Cash: Construction
Contractors 5,718 5,718 5,719 17,155
Supplies 167 167 166 500
Permits/fees 250 -0- 250 500
Interest on old first mortgage 550 550 550 550 550 550 3,300
Principal on old first mortgage 250 250 250 250 250 250 1,500
Loan fees on new 2nd 600 600
Interest on new 2nd 300 300 300 300 300 300 1,800
Developer overhead 1,500 1,500 1,500 -0- -0- -0- 4,500
Total Construction 9,335 8,485 8,735 1,100 1,100 1,100 29,855
Sales—pay off savings of J.R. 5,000
Pay off old first 53,500
Pay off new 2nd 30,000
Sales commission 7,200
Total Sale 95,700
Net Cash -0- 20,665 (8,485) (8,735) (1,100) (1,100) (1,100) (29,855) 12,300
Cumulative Net Cash -0- 20,665 12,180 3,445 2,345 1,245 145 145 12,445
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