How do you finance a fixer?
January 18, 2012 02:35
These days, it seems like a lot of questions that I receive are involving financing of Real Estate. It is still rather difficult to get real estate financing, but with a good mortgage broker and a list of questions, you might be able to get financing for a property that does not meet bank requirements.
Here are a few things that you can do...
1. Get the seller to pay for the work. I closed a deal a few weeks ago that required a lot of seller paid repairs. New electrical, decommission of the oil tank, new plumbing, major chimney repair etc. The repair bill was over $20,000, but the seller was able to pay the contractors out of escrow at closing, so it did not cost the seller any out of pocket cash. The buyer got a house that was really dialed in, and was able to effectively finance the upgrades and repairs with a 30 year loan at about 4%. Not bad.
2. Use FHA 203K financing. FHA has a "Renovation Loan" program that allows buyers to get a loan for the value of the property plus the cost of the needed repairs. This loan may be your best option on bank owned, fannie mae, freddie mac and HUD properties. In fact, with HUD properties, this may be the only type of loan that will allow the buyer to access funds that have been allocated for repairs. These loans are famously difficult to get because of the paperwork that is required. However, if the home is a good deal and the buyer is qualified, it may be worth the extra effort.
3. Put money into escrow to pay contractors after closing. Sometimes it is not convenient to wait for repairs to be made prior to closing. So many lenders will allow buyers or sellers to put funds into an escrow account for "bank required repairs" to be completed after closing. Here in Portland, if you need to put on a new roof in January, you might run into some weather delays. This might be good time to use an escrow company (usually the title company who closes the transaction) to hold the funds, close the transaction and get the repairs made when weather permits. Usually banks want for the escrow amount to be 150% of the bid for the repairs because they to make sure that the repairs get completed, even if the final invoice is higher than the bid.
4. Get a hard money loan. There are a lot of real estate investors in Portland who are familiar with hard money loans. Hard money loans are high interest loans from private lenders with large origination fees. Investors use these types of loans to buy properties that are not "financeable" by banks. Then they proceed to fix up the house, pay the high interest loan and flip the property. This technique can be employed by owner occupants as well... but be very careful if you are an owner occupant. If you are not able to refinance is a very short term, you could loose a lot of money or even the house.
If you have any other ideas about creative financing, please let me know. I appreciate your comments.