Some houses or multi-family properties in real estate can seem un-financeable. This could be for a number of reasons including the perspective buyers or title issues with the properties. Unfortunately, these problems seem to occur after an investor buys a property and then can’t sell it.
Let’s examine the usual reasons that properties cannot be financed and what can be done. The most common issue is likely that the appraisal on a property isn’t sufficient to cover the costs and expenses of a rehab. The investor often only finds this out after he has completed the rehab and has a ready and willing buyer who has to get a conventional bank loan to buy it.
On this same vein, the appraisal may come in but the buyer can’t get financing because of more stringent lender requirements – such as credit scores, time on a job, recent foreclosure history or bankruptcy to mention a few. It may not be as simple as going on to another buyer or just getting another appraisal, especially if this buyer had been declined by FHA in the first place as the investor’s property is “tainted” as to appraisal in the FHA system for at least six months.
The simplest solution to the credit issue and appraisal issues is to get private lenders or portfolio lenders to finance the sale. Private lenders are individuals who are willing to loan money that they would normally have in a bank earning a couple of percent interest. The investor should offer this individual a 10% interest-only loan secured by a first mortgage on a property with a two or three year balloon note. This private lender could also receive 2% to 5% as closing points on the loan and have a pre-payment penalty of three months interest.
The following is an example of what the private lender would get on a $100,000 mortgage: The buyer should be able to put down 20% of the purchase price to secure the mortgage in case of a market decline. A lot of current home buyers have large deposits because they went through foreclosure and haven’t paid mortgage payments for extended periods. 10% interest on $100,000 = $833.33 per month versus perhaps $83.33 in a local bank at a 1% interest on a savings account.
At closing, the lender would get cash of $3,000 to $5,000 as closing points. If the homeowner refinanced during the term of the loan and paid the pre-payment penalty, the private lender would additionally receive $833.33 x 3 months pre-payment penalty = $2,500.
The appraisal should be done by a reputable appraiser and a title policy and insurance should be provided to the private lender. An attorney should draft all the 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 to not have to be dependent on the whims of a local or national bank which may be afraid to lend money in that neighborhood or at that time in the market. The investor should also contact portfolio lenders in his area to see if his buyer(s) qualify. Portfolio lenders are smaller private lenders who do not have the stringent lending requirements of national lenders. Most notably are credit unions.
Another major cause of being unable to finance is because of a title issue and the inability of a buyer to get a conventional loan on the property. If necessary, the investor may have to do what is called a “quiet title action” to do what the courts call quieting any claims. This can take from a few months to a few years but is worth the effort to be able to sell a property at full market value and get conventional financing at that time.
In summary, no matter how impossible it may seem to get funding for a buyer of a property, there are multiple ways to get this done, a couple of which have been mentioned in this article. Looking for properties with defective titles is a great way for investors to get great deals – you just need patience and fortitude.