Real estate investors today are actively buying bank shorts sales and real estate owned. What will you do when you acquire a property that needs more than the usual clean and paint?
Investors in distressed properties are increasingly asking themselves this question. Until now, most investors have avoided acquiring truly distressed homes that might actually create the greatest return for them. This article removes the veil on rehabbing distressed properties and creates a path for getting involved in this potentially lucrative market.
What are we talking about here? These are properties that need some structural, electrical or plumbing work beyond the usual patch and paint. You may need to replace the roof, modify an illegal addition to ensure it conforms to local building code, or rewire half of the house. A well organized investor with the right team of contractor, lender and title company can tackle homes like these that many other investors avoid. That means less competition and potentially higher returns for you.
Here’s an example. An investor locates a property that needs more than the usually clean up and paint. He visits the property with a contractor who specializes in rehabbing homes. He or she is state licensed, familiar with building codes in the city and can organize the various building trade subcontractors. The investor now prepares an offer that considers the cost of the rehab work and the estimated sales price of the home ONCE WORK IS COMPLETED. A completely rehabbed home will create a much larger market of potential buyers – from first time homebuyers to long term rental investors.
Do YOU have to layout cash for both the acquisition and rehab work? Fortunately, no. Many private lenders now finance 50-70% of the acquisition cost of distressed homes for qualified buyers. Increasingly more are now offering to finance part of most of the rehab work as well. Here is how it works:
Purchase Price of Property: $120,000
Estimated Rehab Costs: $30,000
Total Costs: $150,000
Value of Home After Rehab: $200,000
Lender guidelines will vary on the maximum amount of financing they will provide, but here is a typical example:
70% of lesser of after rehab value or
total costs $105,000
Cash required by buyer at closing: $45,000
Before you select a lender, you will want to know more than just the maximum amount they are willing to lend. You will want to know how they will escrow the rehab dollars, disburse funds to you as work progresses and what those costs will be. You want to be sure the lender knows what they are doing, works with reputable and experienced fund control and/or title companies and can deliver quickly because you will have very unhappy contractors if you cannot pay them soon after they perform their work.
Investors should consider broadening the range of homes they will consider buying to ensure they are capturing more of their market and even enhance their returns. Building a great team of contractor, lender, fund control and/or title company is the key to ensuring you minimize risks and turn homes over more quickly to increase your profits
