A Guide to Financing and Acquiring Distressed Property
Distressed property has garnered national attention in the real estate industry, as so many lenders have wound up with foreclosures that they must move quickly to limit losses. However, because of the sticky situation that many lenders are currently in, finding financing to acquire such properties seems nearly impossible for most buyers. Not only have we seen the banking industry take a tumble, but most lenders are now doubly cautious about lending money to purchase these properties again. So, what is one to do?
There are some investors out there that have enough liquid capital to simply snatch up these properties, restore them, and sell them for a substantial profit. But, for most of us, the necessary capital simply isn't there; and, for those of us fortunate enough to have deep pockets, the risk doesn't match the reward. Further, if you DO purchase the property outright, what does that do to your overall portfolio, much less the smart leverage that you currently have?
Fortunately, there are several avenues that an investor can take when pursuing a distressed investment property. But, before we dive into the ways in which you can finance distressed properties, let's first address what you should do before to work on the acquisition!
What To Do Before You Finance?
Distressed properties are usually in disrepair, as many owners of the now foreclosed properties didn't care too much about the state of the property while vacating. While this may seem like a significant issue, it can also help to lower the overall asking price by the mortgagee, which can help to add a level of "built-in profit" for those interested in restoring and flipping the location.
So, before you get your heart set on a particular location, get various appraisals of the necessary repairs. This will give you a better idea of how much capital you'll have to invest, in addition to the asking price, before turning the property and enjoying your profit!
Finding Financing Amidst a Recession
Publications will continue to remind us that the recession is "over". If that's the case, then why aren't lenders ponying up the money we need to acquire property? Exactly. So, with that in mind, remember that banks do not want to hang onto these properties, so most of them are priced to move. Conversely, and ultimately adding to the recession, these banks are also hesitant to put any money back into the locations. In other words, those that can find financing have the real estate industry at their fingertips!
The Original Lender
Though it may seem strange, some banks are willing to offer up some financing on a property that they already own, provided that the new buyer can actually make the payments. This can be a great way to go, provided that you have ALL of the necessary documentation (and be ready, it's a lot) and are willing to endure the incredibly strict evaluation process. If you do, and are up to the challenge, this is one of the better ways to go!
Transactional Funding Option
Transactional funding has seen a nice boom in recent years, given the large number of foreclosed properties currently sitting on the market. Investment firms provide capital for a property's purchase, with a pre-contracted profit margin/sale date already in place at the time of issuance. This lending option is great for properties that will be purchased and sold within a short period of time.
Rehabilitation (Rehab) Loans
Rehab Loans, as they are often called industry, are 203K rehabilitation loans, which allow borrowers to add addition funds to a mortgage, provided that those funds will be used to improve the home and surrounding property. An FHA appraiser is involved in the transaction, as there are several considerations that must be made during the assessment and lending process. Because many distressed properties are in dire need of improvement, the extra $35,000 allowed by law can be a great way to acquire and renovate a potential property!
Finding funding during tough economic times can be a real challenge. As banks continue to hold onto funds, investors continue to find new and inventive ways to arrange the capital necessary for distressed acquisitions. With these concepts in tow, you should be able to acquire property that piques your interest and can likely generate some nice profits along the way!
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