Some multi-family homes or properties in real estate may seem unbankable. This could be for a number of reasons including potential buyers or ownership issues with real estate. Unfortunately, these issues seem to occur after an investor purchases a property and then cannot sell it.
Let’s examine the usual reasons why real estate cannot be financed and what can be done. Possibly the most common problem is that the appraisal on the property is not sufficient to cover the rehab costs and expenses. Often the investor only finds out after they’ve finished rehab and have a ready and willing buyer who would have to take out a conventional bank loan to buy it.
Along the same lines, an appraisal may come in but the buyer can’t get financing due to the lender’s stricter requirements—such as credit scores, time spent on the job, and recent foreclosure or bankruptcy history to name a few. It may not be as simple as going to another buyer or just getting another appraisal, especially if that buyer was rejected by the FHA in the first place because the investor’s property has been “tainted” for appraisal in the FHA system for at least six months. .
The simplest solution to your credit and valuation issues is to get private lenders or portfolio lenders to finance the sale. Private lenders are individuals who are willing to lend money that they would normally get in a bank earning 2% interest. The investor must offer this individual a 10% interest loan secured by a first mortgage on a property with two or three year notes. This private lender can also take 2% to 5% closing points on the loan and has a three month interest prepayment penalty.
Here is an example of what a private lender would get on a $100,000 mortgage: The buyer must be able to lower 20% of the purchase price to secure the mortgage in the event of a market downturn. A lot of current homebuyers have large deposits because they’ve been through foreclosure and haven’t made mortgage payments for extended 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 will receive between $3,000 and $5,000 in cash as closing points. If the homeowner refinances within the term of the loan and pays the prepayment penalty, the private lender will also get $833.33 x 3 months prepayment penalty = $2,500.
Valuation must be carried out by a reputable valuer and a private lender’s title and insurance policy must be offered. The attorney must draft all mortgage documents and do the physical closing to protect the investor/seller and lender.
Using a private lender allows a buyer with poor credit to buy a home. It also allows the seller not to have to depend on the whims of a local or national bank who might be afraid to lend money in that neighborhood or at that time in the market. The investor should also contact portfolio lenders in his or her area to see if the buyer(s) qualify. Portfolio lenders are smaller private sector lenders that do not have the stringent lending requirements of national lenders. Most notably credit unions.
Another major reason for not being able to finance is due to the title issue and the buyer’s inability to obtain a conventional loan on the property. If necessary, the investor may have to go through what is called a “quiet property action” to do what the courts call quell any claims. This may 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 get conventional financing in that time.
In short, no matter how impossible it may be to get financing for a property buyer, there are multiple ways to get it done, two of which have been mentioned in this article. Looking for defective title properties is a great way for investors to get great deals – you just need patience and consistency.