How to finance seemingly unfunded properties in real estate investments
Some homes or multi-family properties in real estate may appear unfunded. This could be for a number of reasons, including potential buyers or property title issues. Unfortunately, these problems seem to occur after an investor purchases a property and then cannot sell it.
Let’s examine the common reasons why properties cannot be financed and what can be done. Probably the most common problem is that a property’s appraisal is not enough to cover the costs and expenses of a rehabilitation. The investor often only learns of this after the rehabilitation has been completed and has a ready and willing buyer who has to obtain a conventional bank loan to purchase it.
In the same vein, the appraisal may come, but the buyer is unable to obtain financing due to stricter lender requirements such as credit scores, time on a job, recent history of foreclosure, or bankruptcy, to name a few. It may not be as simple as going to another buyer or simply getting another appraisal, especially if this buyer has been rejected by the FHA in the first place, as the investor’s property is “tainted” in terms of appraisal in the appraisal system. the FHA for at least six months.
The simplest 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 should offer this person a 10% interest only loan secured by a first mortgage on a property with a balloon note of two or three years. This private lender could also receive 2% to 5% as loan closing points and have a prepayment penalty of three months of interest.
The following is an example of what the private lender would get with a $ 100,000 mortgage: The buyer must be able to deposit 20% of the purchase price to guarantee the mortgage in the event of a market crash. Many of today’s home buyers have large deposits because they went through foreclosure and have not paid their mortgage payments for long periods. 10% interest on $ 100,000 = $ 833.33 per month versus maybe $ 83.33 at a local bank at 1% interest on a savings account.
At closing, the lender would get $ 3,000 to $ 5,000 cash as closing points. If the homeowner refinanced during the term of the loan and paid the prepayment penalty, the private lender would additionally receive $ 833.33 x 3 months prepayment penalty = $ 2,500.
The appraisal must be performed by a certified appraiser and a title policy and insurance must be provided to the private lender. An attorney should draft all the mortgage documents and perform 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 not to 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 buyers qualify. Portfolio lenders are smaller private lenders that do not have the stringent credit requirements of domestic lenders. The most notable are the credit unions.
Another major cause of not being able to finance is due to a title problem and the buyer’s inability to obtain a conventional home loan. If necessary, the investor may have to do what is called a “silent title action” to do what the courts call silencing any claims. This can take anywhere from a few months to a few years, but it is worth the effort to be able to sell a property at its full market value and obtain conventional financing at that time.
In short, no matter how impossible it may seem to obtain funds for a property buyer, there are a number of ways to do so, some of which have been mentioned in this article. Searching for properties with faulty titles is a great way for investors to get great deals; you just need patience and strength.