Homeowners can easily find loans for fixing up their property, but finding rehab funding can be difficult. It's worth the effort, but sometimes it doesn't seem like it. Trying to deal with bank rules and government regulations can be frustrating. They were designed to protect the homeowner from unfair and unethical lending practices, but it turns out that they can prevent rehabbers from achieving their goals; repairing and reselling a property, in order to make a profit. If you are having trouble making the deals that you want to make, hang in there. Help is now available.
There is a new breed of lenders offering rehab funding funds. These private groups and individuals can make loans when the banks cannot or will not. They are not governed by the same regulations, so there is less red tape and less frustration. They can make loans quickly, sometimes in a matter of weeks. They specialize in helping the real estate investor avoid cash flow problems, buy more properties and get them repaired quickly. Sometimes they are referred to as hard money lenders. In reality, they are investors, just like you, but instead of investing in real estate, they are investing in your ability to find and make a good deal.
The better rehab funding providers offer valuable advice, in order to help you find and make those good deals. For example, how do you establish an after repair value? The after repair value is not something that a realtor or an inspector can tell you. A realtor can help you by running comps (comparable homes that have sold in the last year), but you can do it yourself on the internet.
The main thing to remember is that comps are only a beginning point. Averaging comps is inaccurate for many reasons. You still need to do the foot work and get out there to look at the properties. If they look a lot better or a lot worse than the house that you want to buy, then you should disregard them. You want to try to find five or six within a mile or so of the house that you want to buy. You are likely to find that they all closed at about the same price. Without establishing an accurate after repair value, you can not accurately determine what your profit should be, obviously, but you also need it to determine the amount of rehab funding funds that you will need.
What is the best way to determine your rehab funding needs? The amount that you need to purchase and repair the property should not be greater than 65% of the after repair value. Lenders that specialize in loans for rehabbers say that ideally you would want to borrow enough to cover the purchase price, the necessary repairs and the closing costs, limiting your out of pocket expenses, as much as possible. That way, if you underestimate the cost of repairs, you still have your own capital to fall back on. You want to avoid cost overruns, since they cut into your profits, but stuff happens.
Now, not all private lenders are the same. They have different policies. They have various requirements concerning your creditworthiness and proof of your ability to repay the loan. Some are concerned about your ability to make the best deal, providing proof of funds letters to add credibility to the offer that you make to the seller. Others do not offer that service.
Just as you should take the time to find the right property and establish an accurate after repair value, you should take the time to find the right lender. Since there is a growing need for rehab funding, there is a growing number of lenders providing it. Check out and compare several before you decide.
