Rehab Financing with the Local Community Bank

Posted on: September 15, 2009

Categories: Investors, Reviews

Author: buyfixandprofit

300px Affordable housing%2C Damson Way%2C Suckley 2008   813412 Rehab Financing with the Local Community Bank

Rehab Financing Image via Wikipedia

For investors with little to no cash to start with, hard money loans should be considered as the first financing option for buying and fixing foreclosures.  Looking for private investors at the beginning of one’s rehab investing career is difficult due to the lack of experience and no proven track record which is very important to private lenders.  For those investors with some cash to invest, look to the local community bank in the neighborhood you are planning to do business in for your best lending options.

Not all community banks are the same, but there will usually be at least one bank that is tied into the community with investor friendly programs to rehab realestate in the local community.  Rehabbers provide an important service that commercial builders and large corporations cannot compete with.  Rehabbers keep their overhead low and turn ugly houses into beautiful homes that can be purchased or rented at affordable prices by the community’s local residents.

New construction housing is typically too expensive and cannot compete with the value a smart rehabber can provide.  Remember, the goal is to provide affordable housing for the community, not luxury palaces that no one can afford.  A smart rehabber should be able to sell or rent their finished product at or below market rates and still be profitable.  Never bank on the upper end of home sale prices or rents when analyzing a deal for its potential profit or cash flow.

Some of the best loan programs out there are through the local community banks where most rehabs are occurring.  They are usually more flexible in their terms and are happy to deal with investors that will be improving their communities.  You are looking for the banks that actually keep their loans in house and do not sell them to a third party such as Freddy Mac or Fannie Mae.  This allows the bank to be much more flexible in the terms it can offer and how it treats its investors when issues arise.

Combo Purchase and Rehab Loans

Look for a combo purchase and rehab investor loan that automatically converts to a fixed rate loan amortized over 20 to 30 years.  Expect to put down around 20% of the purchase price as the down payment and pay one to two points in fees (one point is one percent of the purchase price).  The bank will typically charge interest only (at a higher than market rate) during the rehab phase of the project until all work is complete and inspected.  The bank will then AUTIMATICALLY convert the purchase/construction loan to a fixed market rate loan.  During the underwriting process for the combo loan, the bank approves a construction and permanent end loan based on the repairs described in your rehab proposal.  This eliminates the headaches of having to quickly refinance your short term construction loan such as when dealing with hard money lenders.

The rehab funds will usually be issued in three to four draws and interest will be charged on the funds as they are borrowed.  Unlike many hard money lenders, some local community banks actually provide the first rehab draw upfront in order to start the rehab with their money and not your own.  The lower fees and simplicity of these programs will allow you to flip foreclosures for maximum profit or create rental properties that offer immediate positive cash flow.

 Rehab Financing with the Local Community Bank
pixel Rehab Financing with the Local Community Bank

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