I am looking at purchasing a foreclosure. It is going to need about $50,000 worth of repairs. I was told I could get 100% financing on the home, but can I take out another loan for the repairs? What is the best way to do that? Are there pitfalls in doing this? Once fixed up, the home will double in value. I am an average consumer, with average credit with stable and a little above average income. Not an invester or realtor.
2006-08-16 09:19:57 · 7 answers · asked by Blitz 3 in Business & Finance ➔ Renting & Real Estate
There is no guarantee the home will double in value; much has to do with legitimate appraisal comparables within 5 miles of you. If you are being told by the Realtor or the loan officer the home will double in value, and you can get that in writing, you probably can sue either one or both for a fraudulent process and misleading practices.
Given you have stable and average income, the risk is higher for failure when compared to having savings that could cover the repairs without adding to your overall monthly debt payments.
If the loan officer is telling you that you can get a loan on a foreclosure in need of repairs, based on your credit scenario, ask him what kind of crack he's putting in his pipe. You will have financed it up 100% on your scenario, and no loans are given for unimproved collateral (meaning the state of the home before it's repaired). If you can get a loan for repairs on a foreclosure acquisition, it will have to be a loan not tied to the home (meaning not collateralized) and this loan will be at a very high rate of interest.
I would tell you stay away from this kind of speculative deal based upon your lack of experience in this industry and based upon the statistics of rehabbing foreclosures in the manner you describe. Statistics show over 60% of these home end up back in foreclosure or end up as short sale (selling for less than the purchase price plus the money you put into the home), when the buyer's resource for repairs is another loan as opposed to saved wealth. Even then, the statistics are not great, so be careful.
Good Luck with whatever you decide.
2006-08-16 09:55:43 · answer #1 · answered by rightonrighton 3 · 1⤊ 0⤋
You can certainly take out another loan if you have something
with equity to use as collateral.
You probably cannot use the home as collateral because
it is already spoken for (it is collateral for the base loan).
You cannot use the estimated value of the house after you
had applied the repairs as collateral for the money to make the
repairs. If you decided to run away with the money,
the bank would be left with nothing.
If you don't have the equity or sufficient funds, you may need
to have somebody else help by co-signing the loan.
If your credit is good enough, the bank may just say that
it is OK to make the base loan cover the cost of the house
and the repairs - it really depends on how big the base
loan is and how good your credit is.
2006-08-16 09:24:01 · answer #2 · answered by Elana 7 · 0⤊ 0⤋
I would write your contract in such a way that you can get back what's known as "cosmetic update allowances.:
Say for example, you are buying the house for $200K. The house will be worth $400K after rehab. You can write the contract for $260K, $10K in closing costs, and $50K in "cosmetic update allowance." This needs to be held in escrow and paid to your contractor upon completion of the work.
The bank will loan you the $260K, because for them it's a no brainer. The house is worth $400K ARV (after repair value) and that makes their LTV only 65%.
If the house you are buying is a short sale, then that won't work, because lenders won't allow cosmetic update allowances. But if it's a homeowner you are buying from, or most REOs, then you are OK.
This way you don't have to come up with any money down or any money for rehab. Just sell the thing and take your money and run.
As far as that guy's statistics about rehabbers and foreclosures, etc, he's full of it. The rehabbers that go under are the ones that are poorly capitalized and they don't know how to exit properties effectively. When people give you advice, make sure they have DONE what they are actually talking about. Mortgage people, realtors, Federal Banking people -- they aren't RE investors. Talk to a successful RE investor about your ideas, not people who basically make their living with tips. (No offense to my realtor brothers out there.)
If you know what you are doing, you'll be fine. And, by the way, buying a foreclosure to fix and flip? That makes you a RE investor. Welcome to the club .. :)
Email me if you'd like help.
God bless!
Dale
2006-08-16 12:46:38 · answer #3 · answered by wealthedge 2 · 0⤊ 0⤋
You may have trouble getting a loan for repairs if you have "average" credit. If it's an older home, no matter how much you put into it or what you do to it, it seldom brings double-value come resale time.
You'd be better off purchasing a home and then renting it out.
2006-08-16 09:26:07 · answer #4 · answered by Big Bear 7 · 0⤊ 0⤋
You can first purchase the home. (unless the repairs will not support an appraisal) Since you are purchasing under market value, you can take out a loan for the equity after you own the home. If you live in anoter home and the new one is in your area it will be considered an investment property
2006-08-18 23:33:11 · answer #5 · answered by Toni F 1 · 1⤊ 0⤋
You can use a HELOC as a 2nd & use that for any necessary repairs. Its an open line of credit so you can qualify for more than what you need that could act as back up or emergency funds.
If you have any more questions feel free to visit my website!
You can send me an email, request a quote or contact me directly.
www.lindamunoz.net
2006-08-16 09:56:00 · answer #6 · answered by YAY Me! 2 · 1⤊ 0⤋
There is something called 106% financing. The extra 6% is used for repairs etc.
2006-08-16 09:25:24 · answer #7 · answered by sashaNY 3 · 1⤊ 1⤋