How to finance seemingly unfinanceable properties in real estate investing

How to finance seemingly unfinanceable properties in real estate investing

Some houses or multi-family properties in real estate may seem unfinanceable. This could be due to a number of reasons, including prospective buyers or property ownership issues. Unfortunately, these problems seem to arise after an investor buys a property and then cannot sell it.

Let’s take a look at the common reasons properties can’t be financed and what can be done. The most common problem is probably that the assessment of a property is not enough to cover the costs and expenses of rehabilitation. The investor often finds this out only after the rehab is complete and there is a ready and willing buyer who needs to take out a conventional bank loan to buy it.

Likewise, the appraisal may come in, but the buyer may not be able to get financing due to more stringent lender requirements – such as credit ratings, time in business, recent foreclosure history, or bankruptcy, to name a few. It may not be as simple as going to another buyer or simply getting another appraisal, especially if that buyer was rejected by the FHA in the first place because the investor’s property was “tainted” in terms of appraisal in the FHA system for at least six months.

The simplest solution to credit and appraisal problems is to have private lenders or portfolio lenders finance the sale. Private lenders are individuals willing to lend money that they usually have in a bank, earning a few percent interest. The investor should offer that person a 10% interest-only loan secured by a first mortgage on a property with a two- or three-year bubble. This private lender may also charge 2% to 5% as final points on the loan and have a prepayment penalty of three months’ interest.

The following is an example of what a private lender would receive on a $100,000 mortgage: The buyer must be able to put down 20% of the purchase price to secure the mortgage in the event of a market downturn. Many current home buyers have large deposits because they have gone through foreclosures and defaulted on mortgage payments for extended periods. 10% interest on $100,000 = $833.33 per month vs. maybe $83.33 at a local bank at 1% savings account interest.

At closing, the lender will receive $3,000 to $5,000 in cash as closing points. If the homeowner refinances during the loan term and pays the prepayment penalty, the private lender will receive an additional $833.33 x 3 months prepayment penalty = $2,500.

The appraisal should be done by a reputable appraiser and the private lender should be provided with a title and insurance policy. The attorney must prepare all mortgage documents and perform the actual closing to protect the investor/seller and the lender.

Using a private lender allows a buyer with insufficient credit to purchase a home. It also allows the seller to be independent of the whims of a local or national bank that may be afraid to lend money in that neighborhood or at that time of the market. The investor should also contact portfolio lenders in their area to see if their buyer(s) qualify. Portfolio lenders are smaller private lenders that do not have the strict lending requirements of national lenders. Mostly credit unions.

Another major reason for inability to finance is the title problem and the inability of the buyer to obtain a conventional loan for the property. If necessary, the investor may need to take what is called a “quiet title action” to do what the courts call a quieting of any claims. This can take anywhere from a few months to a few years, but it’s worth the effort to be able to sell a property at full market value and get conventional financing at that time.

In summary, no matter how impossible it may seem to get home buyer financing, there are many ways to do so, several of which are mentioned in this article. Searching for defective title properties is a great way for investors to get great deals – you just need patience and fortitude.

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