How to finance seemingly unfinanceable properties in real estate investing

Some homes or multi-family properties in real estate may seem unaffordable. This could be for a number of reasons including perspective buyers or ownership issues with the properties. Unfortunately, these problems occur when an investor buys a property and is unable to sell it.

Let’s examine the common reasons why properties cannot be financed and what can be done. The most common case is that the assessment on the property may not be enough to cover the costs and expenses of the restoration. The investor usually finds this after he has completed the renovation and has a ready and willing buyer and must obtain a conventional bank loan to purchase.

Similarly, the appraisal may be entered but the buyer cannot obtain financing because of more stringent lender requirements – such as credit scores, tenure, recent foreclosure history or bankruptcy to name a few. It may not be as simple as going to another buyer or getting another appraisal, especially if this buyer is rejected by the FHA in the first place because the investor’s property is “tainted” by 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. Personal lenders are individuals who are willing to lend money they have in the bank while earning two percent interest. The investor has a two- or three-year balloon note with a 10% interest-only loan secured by a first mortgage on the property. This private lender may charge 2% to 5% on the loan as a closing point and have a three-month interest prepayment penalty.

The following is an example of what a private lender would find on a $100,000 loan: The buyer must be able to put down 20% of the purchase price to secure the loan in the event of a market crash. Many current homebuyers are sitting on large sums of money because they went through foreclosure and missed mortgage payments for a long time. 10% interest on $100,000 = $833.33 per month and probably $83.33 in a local bank savings account at 1% interest.

At closing, the lender will receive $3,000 to $5,000 in cash as a closing point. If the homeowner refinances during the term of the loan and pays the prepayment penalty, the private lender will receive an additional $833.33 x 3 months prepayment penalty = $2,500.

The appraisal should be provided by a reputable appraiser and the title policy and insurance provided to the private lender. An attorney must draft all mortgage documents and perform the proper closing to protect the investor/seller and the lender.

Using a private lender allows a buyer with a defective loan to purchase a home. It also allows the seller not to depend on the needs of the local or national bank, which may be afraid to lend money in that neighborhood or market at that time. The investor should contact their local portfolio lenders to see if the buyer(s) qualify. Portfolio lenders are smaller private lenders that do not have the strict credit requirements of national lenders. Especially credit unions.

Another major reason for failure to finance is ownership issues and the buyer not being able to get a conventional loan on the property. If necessary, the investor will need to do what the courts call a “quiet title” to quiet any claims. This may take a few months to a few years, but it’s worth trying to sell the property at full market value and get conventional financing at that time.

In conclusion, no matter how impossible it may seem to get money for a property buyer, there are several ways to do it, two of which are mentioned in this article. Searching for flawed titles is a great way for investors to find great deals – you just need patience and tenacity.

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