How to Finance a Re-Hab Job on a Foreclosure Investment

Published by julia | Filed under Buyer / Seller Tips, Miscellaneous, Real Estate, Shout Outs

The plethora of foreclosures on the market now includes a variety of properties. Some are in excellent shape and ready for re-sale immediately. Others are suffering from a variety of types of damage and need money put into them to fix them up to make them attractive buys. However, the damaged properties are often available at significant discounts, making them attractive buys for real estate investors who specialize in rehab flips. These investors buy a distressed property for a heavy discount, fix it up, and then re-sell it for a nice profit. If this describes what you want to do, here’s how to finance those needed repairs.

Since most traditional banks won’t include the price of repairs in a traditional mortgage, buyers need to look elsewhere for that type of financing. Usually, the source of cash ends up being a re-hab lender. Re-hab lenders put a lot of weight on the value of the property after it’s repaired, so any current damage won’t figure too heavily in their appraisal. Most lenders of this type can lend money equal to about 50 to 60 percent of the after-repair value of the house with a 10 to 25% down payment (which is based on the total cost of the property with repairs, not the purchase price alone). Some lenders may also require a specific amount of cash flow from the property be generated after repairs are made.

An example of how re-hab lending works would be a foreclosed property that had a purchase price of $100,000. If the re-hab costs are also $100,000, then the total cost of the house would be $200,000. If the after-repair value of the property is $310,000 (based on recent comparable sales), and the after-repair value is 64% of the loan-to-value ratio of the house, then the re-hab lender would almost certainly approve a loan of $100,000 to repair the property.

Some re-hab lenders offer weekly cash withdrawals from the loan proceeds, to be done until work is completed. If you end up needing more money because of an underestimate in repair costs, then you would need to request more money from the lender. If your request is denied, you must come up with the additional money on your own, usually through credit cards and personal loans from banks, family, and friends.

Re-hab loans are short-term loans, and usually carry about an 8 to 12 percent interest rate and closing costs of between 3 and 5 percent of the loan. The length of the loan is usually between 6 and 12 months.  If you’re looking to invest in foreclosure re-hab projects to flip for profit, it’s best to secure re-hab lending before seeking traditional financing to purchase the house, as this can work in your favor with the lending bank. If you’ve done all your homework and completed the necessary research, investing in re-hab foreclosure flips can be a lucrative side business that can produce excellent returns for you.