Some homes or multi-family properties in real estate may seem unfinanceable. This can be due to a number of reasons including potential buyers or title issues with the properties. Unfortunately, these issues seem to arise after an investor buys a property and then cannot sell it.
Let’s look at the common reasons properties can’t be financed and what can be done. Probably the most common problem is that a property’s appraisal is not sufficient to cover the costs and expenses of rehab. The investor often only discovers it after completing the rehabilitation and has a ready and willing buyer who must secure a conventional bank loan to purchase it.
Along the same lines, the appraisal may come in, but the buyer can’t get financing due to more stringent lender requirements – such as credit scores, time worked, recent track record. foreclosure or bankruptcy, to name a few. It may not be as simple as moving on to another buyer or just getting another appraisal, especially if that buyer was turned down by the FHA in the first place because the investor’s property is “tainted.” as to evaluation in the FHA system for at least six months.
The easiest solution to credit and appraisal issues is to have private lenders or portfolio lenders finance the sale. Private lenders are individuals who are willing to lend money that they would normally have at a bank and earn a few percent interest. The investor should offer this person a 10% interest-only loan secured by a first mortgage on a property with a two- or three-year balloon rating. This private lender could also receive 2% to 5% as loan closing points and have a prepayment penalty of three months interest.
Here is an example of what the private lender would get on a $100,000 mortgage: The buyer should be able to deposit 20% of the purchase price to secure the mortgage in the event of a market downturn. Many current home buyers have large deposits because they suffered foreclosure and have not paid their mortgage payments for long periods of time. 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 would obtain cash of $3,000 to $5,000 as closing points. If the homeowner refinanced during the life of the loan and paid the prepayment penalty, the private lender would additionally receive $833.33 x 3 months prepayment penalty = $2,500.
The appraisal must be carried out by a reputable appraiser and a title policy and insurance must be provided to the private lender. A lawyer should draft all mortgage documents and do the actual closing to protect the investor/seller and the lender.
Using a private lender allows a buyer with blemished credit to purchase a home. It also allows the seller not to be dependent on the whims of a local or national bank who may be afraid to lend money in that area or at that time in the market. The investor should also contact portfolio lenders in their area to see if their buyer(s) are eligible. Portfolio lenders are small private lenders that do not have the strict lending requirements of domestic lenders. These include credit unions.
Another major cause of inability to finance is due to a title issue and a buyer’s inability to obtain a conventional loan on the property. If necessary, the investor may have to do what is called a “silent title action” to do what the courts call appease any claim. It can take anywhere from a few months to a few years, but it’s worth it to be able to sell a property at full market value and get conventional financing at that time.
In summary, as impossible as it may seem to obtain financing for the buyer of a property, there are several ways to achieve this, a few of which have been mentioned in this article. Finding properties with faulty titles is a great way for investors to get good deals – you just need patience and courage.