Financing Your Rehab? Go To The Bank Or Be The BANK, Which Do You Prefer?

Financing your rehab property has taken on new challenges for investors. Many rehab property investors are still licking their wounds from the sub prime meltdown.

When the traditional banks arbitrarily rejected appraisals and devalued the property you had invested in, everyone in the investment pipeline was seriously affected.

When the traditional lenders literally pull the rug from underneath you, there is no choice but to find other, more reliable financing alternatives. Since the funding landscape has changed we must adapt, adjust, and improvise!

The lenders began a trend of property devaluation with their appraisal reviews. Since prices in many areas are down, your acquisition and repair costs should also be down. Instead of following the previous loan to value ratios of 65% to 70% of After Repaired Value (ARV), it works much better if you reduce that range to no more than 60% of ARV.

Loan to values in that range make it easier for you to fully fund your buyer instead of depending on a bank or mortgage lender.

Whether your acquisition is the result of a basic rehab or the clean up and reconditioning of a "short sale" property, it is much easier to get properties at less than market value because of the current housing market. The use of hard money or private funds can take care of the acquisition and repair costs, but you still have to pay your lender off as soon as possible.

This funding strategy, called the "rehab payoff", can make you the bank instead of the borrower. In this example the market value of the property is $200,000. You are able to buy and repair the property for $120,000. This amount includes all holding costs. That means you are at the 60% L-T-V maximum for this illustration.

You, the investor, must pay your funding sources $120,000 plus accumulated interest. The property buyer must provide a 20% down payment, and the sale price of the property is $200,000. This is one way the deal can be structured.

Funds of $40,000 from the buyer's down payment and $80,000 from a partial note sale will pay off the lien holder balance due of $120,000.

You will receive 60 monthly payments of $1,174.02 for a total of $70,441.20. At the end of 60 months you will also receive the balance due on the note of $743.61.

The total you will receive for your property will be $191,184.81. You can get more if you extend the balloon payment due date.

The total received is 60% of the sale price, which allows you to pay off the lien holder and become the bank to the property buyer. The discount is 8.04% including commissions.

Instead of refinancing with a bank and pulling cash out, you eliminate the need to deal with tenants, toilets, and trash. Rather than go to the bank you become the bank and collect over $70,000 before the buyer refinances the property.

In summary, you the Seller, get: