Financing Rehabs
First off, we're not professional rehabbers, I'm here for commercial/development stuff. However, I've found a rehab project that we will be using as our personal home for the next year or so (we'll be building a home shortly that we'll eventually move into). The rehab is in a good neighborhood, has been on the market for over a year and would be easy to rent or sell at a profit once it's fixed. My previous mortgage experience has been strictly fha which wouldn't be an option because of the condition of the house.
This house is livable, but the inspection report lists problems with just about everything. Nothing horrible, but something is wrong with everything. Roof is at the end of it's expected life (not leaking yet , and could wait until fall when it's cooler), foundation leveling (it's on piers, not a slab), new porch needed, no stove, some electrical problems and really old wiring, some plumbing issues, old window unit ac's, small gas leak to old heater that would need to be found before getting it turned on, etc., etc. All in all, about 30k of work, including cosmetics (that's with some "free" labor of dyi). We've restored a 100 yr old family home previously so most of the work is nothing we can't handle or don't have experience at, plus we really enjoy fixing up houses so it's fun.
Deal particulars:
ARV ~180k (conservative figure)
Asking price 110k
Est. Repairs/materials 30k
So, the question. We're currently renting and all cash, etc., is tied into business and commercial deal I'm working on. What financing options are there for OO rehabs? We did a 203k fha previously and I'd really like more freedom than that offered. I don't absolutely need cash for the repair costs, although that'd make it easier. I just don't know if a normal bank or mortgage broker would loan on a house in this condition?? I think the seller would pick up a 2nd if needed, possibly carry the whole note but I'd have to convince him that other financing options are limited, or nonexistent, because of the houses condition.
Suggestions?
THANKS!
I have used all of these at one point or another.
HELOC after you close, if an apprasial would justify that.
credit card (esp. if you can do the work quickly and not have to carry debt.
A new CC which has cheap or 0% intro rate.
signature loan
unsecured business line of credit.
HR,
I'm just a newbie, but my understanding of the Rehab loans was that they took the houses future value into consideration as much as the current condition. You might consider get two or three bids from other contractors, to submit with your loan papers so that the lender could see you number of 30K wasn't out of line.
HTH,
Robert
[addsig]
Financing the rehab isn't a huge issue. We're going to be doing most of the work ourselves so a good chunk of the 30k is materials only. We can either cc it or pay as we go. Having it included in a rehab loan would be nice, but if it limits us in dyi aspects or makes us lose control then I don't want one (sorry, just bad experience with 203k fha and having to do everything their way).
So back to acquiring the property to begin with. If we just use as-is value, is conventional financing even an option with the property's condition?? I can't see how we could get any insurance other than the rehab kind that's been suggested on other posts (foreman?). We don't plan on replacing the roof until fall when it's cooler (we'll be doing that ourselves, been there, done that, and it's not that hard), which probably wouldn't make any insurance companies happy.
Two ideas....
Have the seller carry the first and you agree to put funds into escrow for the repairs. He gets little protection with the present state but can see the cash sitting there to do the improvements. The escrow pays out as you go. This assumes that you have cash for a down payment but agree with the seller that it is not given to him.
Second idea...
Do a lease/option. You move in now, Pay monthly rent (minimal in this case) and then after 6-12 months of work you convert the property by exercising the option. You will likely have to explain the jump in value. If you can only borrow against the option price then set the option to reflect the repairs plus the purchase price so when you exercise you can claim the higher purchase price. The seller will show the repair money as a credit back so they is no tax issue there.
I can think up a lot of other ways to do the deal. It mostly comes down to the seller recognizing that they can not sell if conventional financing is required.
John
[addsig]
There is a conventional equivalent to the 203k called "HomeStyles" that is for owner occupied rehab projects (and Non Owner with restrictions)). You may be able to get up to 100% of the costs depending on your situation.. I hope this helps!
Quote:
On 2004-06-01 16:01, fhop29 wrote:
There is a conventional equivalent to the 203k called "HomeStyles" that is for owner occupied rehab projects (and Non Owner with restrictions)). You may be able to get up to 100% of the costs depending on your situation.. I hope this helps!
FHOP,
Where can someone find more info on "HomeStyles"?
Quote:
Where can someone find more info on "HomeStyles"?
Try this
Thanks for the article link. I'm still leaning towards financing the rehab costs separately tho. Are banks/mortgage companies OK with lending on these properties as-is?? Like I originally said, my personal mortgage experience is limited, all FHA. I'm used to their inspection criteria and am just unfamiliar with "regular" mortgages. Even a drive-by appraisal should note the condition of the outside porch which ought to raise a red flag I'd think. Other than that, the house looks fine on the exterior (the roof looked okay to me, the inspector put 0-2 yrs remaining of useful life on his report). Is it standard practice for a mortgage company to ask for an inspection nowadays?
Your question seems to be whether a mortgage company will loan conventional purchase funds for a home in poor condition. You are concerned because of your prior experience with FHA-financing where certain property condition requirements & inspections are involved. I think VA-financing is similar though I have not used either FHA or VA.
Over the years I have purchased 4 homes (CA, WI, IA, MI) with conventional funding. Inspections were my choice and were between me and the seller (just as a contigency of my purchase in the contract). The mortgage company generally doesn't know/care much about the condition of the property; they just use an appraisal to determine the value. Of course, the condition may affect the appraisal, but it sounds as though you can deal with a low-value appraisal. Check with a local mortgage broker to be sure, but it doesn't sound as though you should have problems with this.
The Homestyles Renovation program is a Fannie Mae product (one of the two largest secondary market investors) Most mortgage bankers and brokers can access this information for y ou. It allows for rehab funds up to 95% financing on owner occupied properties. Good luck.
http://www.fanniemae.com/homebuyers/findamortgage/mortgages/renovation.jhtml?p=Find+a+Mortgage&s=Mortgage+Solutions&t=By+Borrower+Need&q=Build/Tap+Equity
Thanks tjl2000, that's exactly what I needed to know. Thanks also to everyone else for the helpful info. I'll look into the fannie mac product, but I'd rather go conventional and refinance to recoup the $$ I put into it rather than having to satisfy lenders criteria.
Thanks again!
I Would try and take the property "Sub-To" as this would minimize my closing costs and keep my cash intact while remodelling. I would put a 1-2yr balloon on it if possible so that the seller knows your going to pay him, fix the house, then you can refinance at conventional rates (hopefully wiht lower closing costs) and have your equity available in a HELOC. IF your afraid of the DOS (that is almost never exercised) then put it in trust in the owners name with yourelf as the trustee and have him sign over beneficial interest to you.
[addsig]
There doesn't appear to be a mortgage on it at all, which should make creative financing an easier option. From the info I got on it at the courthouse, I believe it's inheritted property that's owned outright by a brother/sister. Thanks for the suggestion tho. I think I may initially offer a creative option with a 1 or 2 yr balloon and then refinance it after the repairs are made (well documented before/after pics and receipts to justify change in appraisal)
The other alternative that comes to mind would be to try a local bank or Credit union for a new first at say $70,000. Then a seller second at say $60,000 the $20,000 extra goes into a construction escrow to get the repairs made.