Real Estate

How to finance apparently unfinanced properties in real estate investments

Some homes or multi-family properties in real estate may appear unfinanceable. This could be for any number of reasons, including prospective buyers or title issues with the properties. Unfortunately, these problems seem to occur after an investor buys a property and is then unable to sell it.

Let’s take a look at the common reasons why properties can’t be financed and what can be done. Probably the most common problem is that the appraisal of a property is not enough to cover the costs and expenses of a rehabilitation. The investor often only discovers this after the rehab is complete and has a ready and willing buyer who has to obtain a conventional bank loan to purchase it.

Similarly, the appraisal may arrive, but the buyer may not obtain financing due to the lender’s more stringent requirements, such as credit scores, time on the job, recent history of foreclosure or bankruptcy, to name a few. It may not be as simple as moving on to another buyer or simply getting another appraisal, especially if the FHA turned this buyer down in the first place because the investor’s property has been appraised “tainted” in the FHA system for at least least six months. months.

The easiest solution to credit and appraisal problems is to get private lenders or portfolio lenders to finance the sale. Private lenders are people who are willing to lend money that they would normally have in a bank earning a couple of percent interest. The investor must offer this person a 10% interest-only loan secured by a first mortgage on a property with a two- or three-year balloon note. This private lender could also receive 2% to 5% as loan closing points and have a prepayment penalty of three months of interest.

Here is an example of what the private lender would get with a $100,000 mortgage: The buyer should be able to pay 20% of the purchase price to insure the mortgage in the event of a market downturn. Many of today’s home buyers have large deposits because they have been through foreclosure and have missed mortgage payments for extended periods of time. 10% interest on $100,000 = $833.33 per month vs. maybe $83.33 at a local bank at 1% interest on a savings account.

At closing, the lender would get cash from $3,000 to $5,000 as closing points. If the homeowner refinanced during the loan term and paid the prepayment penalty, the private lender would receive an additional $833.33 x 3 months prepayment penalty = $2,500.

The appraisal must be done by an accredited appraiser and a title policy and insurance must be provided to the private lender. An attorney should draft all mortgage documents and do the actual closing to protect the investor/seller and the lender.

Using a private lender allows a buyer with bad credit to purchase a home. It also allows the seller to not have to depend on the whims of a local or national bank that may be afraid to lend money in that neighborhood or at that time in 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. Most notable are the savings and credit cooperatives.

Another major cause of not being able to finance is due to a title problem and a buyer’s inability to obtain a conventional loan on the property. If necessary, the investor may have to take what is called a “silent title action” to do what the courts call to silence any claim. This can take anywhere from a few months to a few years, but it is well worth the effort to be able to sell a property at full market value and obtain conventional financing then.

In short, no matter how impossible it may seem to obtain financing for a home buyer, there are several ways to do it, some of which have been mentioned in this article. Searching for properties with bad titles is a great way for investors to get great deals – you just need patience and fortitude.

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