Rehab Financing for Foreclosed Properties
As I have mentioned previously, probably 90% of the properties that I am looking at with customers these days are foreclosures. Most of them need work. At the minimum, all need carpet and paint ($5000). Most need much more than that including windows, kitchen & bath remodels, and potentially a new roof (see Flipping a $30,000 House).
When I was talking to Rob Bonahoom today, I realized that I preach about the fantastic opportunities to buy houses in North Minneapolis at incredible prices, but I rarely write about how the rehab financing works.
When you buy a house, traditional financing sources assume the house is move-in ready. They don’t care if the carpet is old or it needs paint, but they will not give you mortgage if the copper is missing or the furnace is dead. Rehab financing bridges the gap and give you cash to fix up the house and make it livable. It is meant as a temporary solution (most rehab loans are 6 months long), allowing you to buy and renovate the property. You will secure traditional financing via a refinance at the end of your rehab.
The program that we have in place allows a buyer to put 20% of the total rehab and purchase price into a secured savings account with our bank. You did not put in a down payment, but rather you pledged your money with the bank in case you can not finish the rehab and the bank needs to take back the property. The bank estimates the after repaired value by having an appraiser look at the property prior to any work starting and then reviewing the work to be performed and extrapolating a new value (after repaired value).
At closing, the bank will pay the seller and then reserve the remainder of the loan for construction/rehab. During your rehab, you or your contractor will make draw requests from the bank to pay off materials and work that has been completed.
At the end of your rehab, you simply contact your mortgage banker and have him refinance you into a traditional mortgage. If you are under 75% LTV, you may not need to put any money into this transaction. Once you close your refinance, our bank gives you your 20% back. Consequently, you have a fully renovated property that you have 25% equity in that you only spend $6-8000 in closing costs to acquire.
If you want more information on how you can acquire and renovate investment property for less than $10,000 per property, contact me now?
Hi Scott! Great article! I “want more information on how you can acquire and renovate investment property for less than $10,000 per property”, but was unable to find a place to “contact me now” on this blog? Can you go into more detail about that, or send me information on what lender you’re using, etc.? (I’m a Realtor (c) in Charlotte) Thanks!!
I have properties aquired that I renovate and rent. I have a property that needs renovation under $10,000. I have used all of my own money and looking for financing. Maybe you can help. We are a small business investing in rental property.