Efficient Lending for Property Rehab Investors

Finding Efficient Lending for Real Estate Investing Rehab Loans

Many investors have developed lucrative careers by investing in less-than-perfect residential or commercial properties, renovating them and reselling (or renting) them for a profit. The real estate market has now turned around, and although foreclosures are on the decline, good fix-and-flip deals remain available.

If you’re such an investor, or a mortgage broker trying to help these investors, you likely know that the usual sources of financing—major banks and financial institutions—often just don’t move fast enough, or lend large enough amounts, to help these investors with the quick, “in-and-out” financing they require. And local hard-money lenders usually don’t have the corporate bona fides to justify your comfortably steering your clients toward them.

Efficient Deal Sources Require Efficient Lending

Investors utilize a much broader range of potential property acquisition sources than do most buyers. Lists of repossessed properties available from the U.S. Department of Housing and Urban Development, local banks, trustee sales, tax auctions, sheriff’s sales, probate attorneys, bankruptcy and divorce attorneys all can be ways of finding properties and sellers who want to off-load them promptly.

Finding these motivated sellers is not enough. These markets are also competitive, and investors can lose a good opportunity if they’re not able to show evidence of financing in hand or to subsequently close promptly on a purchase.

Investor Rehab Loans

Fix-and-flip investors not only need access to money fast, they also don’t want to have to worry about the condition of the property disqualifying them. Some of the best fix-and-flip deals are in less-than-stellar shape. Conventional lending sources, though, often want all the repairs buttoned down before they’ll consider lending—or if they do loan, base their loan amounts only on the purchase cost of the property. But a rehab investor needs the repair costs financed as well. Traditional lenders also can be slow-moving; good deals go a lot faster than a commercial bank can approve a mortgage for the property. The usual lending sources just aren’t a fit.

Investor rehab loans, on the other hand, are made for these types of investors—the loans are meant for purchasing and renovating properties. They’re great for fix-and-flip homes and can also be useful to long-term buy-to-rent investors who need fast financing now before turning to a more traditional source later on. Rehab loans generally cover rehab costs as well as the property’s purchase, although they sometimes disburse the rehab amounts through draws while the rehab is being completed, when the lender has evidence of some of the completed repairs.

Are Online Lenders A Better Option?

Investor rehab loans are one of the most effective—and sometimes one of the only—ways for the investor to pay for the purchase without cutting a check directly from his bank account. But which of the available sources can a broker trust? Many of the smaller finance shops that focus on investor rehab loans are a little too fly-by-night for many investors’ (or brokers’) tastes—and since professional investors keep doing deals on a continuing basis, they (or their brokers) want to be particularly careful about protecting those clients.

The new online crowdfunding lenders can often be a great option. The company where I work, for example, is a leading—and well-capitalized—online real estate lender, one whose mission is to use technology to make fix-and-flip rehab loans simple and fast. The application process is straightforward and simple. The investor merely has to provide a few key parameters—the location of the property, the purchase price, the rehab budget, their income and net worth, plus a few other items —and our technology helps take care of the rest. Generally, this results in letters of intent being turned around within 24 hours.

Online crowdfunding lenders can also help to extend an investor’s geographic reach. An investor focused on Boise, Idaho, for example, may not be able to find a bank or hard-money partner with either sufficient speed or resources to help him do multiple flips in that area. Many smaller finance companies dealing with investor rehab loans have enough financing for a few projects, but are left scrambling if too much volume comes through the door.

Online lenders, however, have investors from across the country who are eager to provide financing—so that active investors (or their brokers) can effectively gain access to a much broader pool of capital. This capital pool may not be inexhaustible, but it’s pretty close. My company, for example, adds new investors at a clip approaching 50 per day, so that new capital sources are continuously being added. Moreover, crowdfunding investors who have had one rehab loan go full cycle tend to come back and do other loans, so that money is continuously recycled back into other projects.

The Application Process

It is important that the rehab investor (or his broker) be prepared with the details of the property and his own financials. Even crowdfunded lenders can’t give a loan approval without having certain key information in hand. That information typically includes:

1. Purchase price
2. Rehab budget
3. 3. Square footage
4. Added square footage (if footprint is being expanded)
5. Estimated duration of project
6. Estimated after-repair value
7. Borrower financials (monthly income, debt, net worth and cash reserves)

The borrowers’ supporting financial records (bank statements, etc.) may take a bit of time to gather up and so should be among the top tasks. Borrowers should also be prepared to undergo background and credit checks, and to provide information about the contractor expected to be utilized. They should also have at hand copies of the formation documents for their purchasing entities so that signing authority can be verified.

This information is usually enough to enable a lender to make a basic preliminary decision. As credit checks are run and broker price opinions or appraisals obtained, there may be further requirements if values aren’t confirmed—but if a borrower is ready with the key information described, the better asset-based lenders should be able to make prompt decisions.

Good Things Come To Those Who Are Prepared

Most delays in the lending process are due to lenders waiting on borrower documentation. Borrowers who are prepared to supply their financial information, rehab budget, contractor track record and any broker price opinions available for the property will enjoy a much speedier borrowing transaction. The sooner that property financings can occur, the quicker investors can get back in the hunt for finding other rehab opportunities.