Getting the money to finance your rehab property

Real estate investors are often surprised when their borrowing process hits roadblocks in the finance area.

Many banks are just not focused on investment property loans. They often want plain-vanilla, owner-occupied mortgages. That’s their usual business.

It’s certainly possible for investors to establish a relationship with a smaller bank that does focus on rehab investors (or “flippers”). It takes time, though, since the bank will need to get comfortable with your track record and personal wherewithal.

The bigger banks and financial institutions are usually not a viable alternative. Rehab loans are a different animal from the usual owner-occupied loans. Investors need to find lenders that are focused on loans meant for purchasing and renovating properties.

3 reasons most banks are not in the real estate finance investment business

As I mentioned, rehab loans are a different animal. Although some smaller banks will do business in this space, bigger banks typically do not make (or are bad at) investor rehab loans for several reasons; here are three big ones:

1.  Banks do not like to lend on non-occupied property: For the loans that are being made to rehabbers, the properties are typically vacant and are in need of some repair. This is precisely the opportunity the rehabber is looking for — and yet big banks tend not to like these same opportunities. The underwriting rules at these larger institutions are often quite rigid, and the banks typically reject properties in disrepair or that require more than a minimal amount of renovation.
2.  Banks are bureaucratic, and rehab loans are short-term: Most of these loans have a short term — anywhere between 6 to 24 months. (After that, the investor hopes to either “flip” the property — sell it — or get a conventional loan to keep it as a long-term rental property.) By the time a bank sends the loan to underwriting, then senior underwriting, then senior senior underwriting, it is difficult for them to recoup the cost they spent making the loan given its short duration. Plus, investors typically just can’t wait that long to know whether financing will be lined up; good deals go a lot faster than a commercial bank can approve a mortgage. If you can get a good bank credit line established, great; but many banks are reluctant to deal with rehab loans on a one-off basis.
3.  The borrower may already have four traditional bank loans: For loans that are made to professional investors, conventional lenders tend to limit the number of loans that any one borrower can have outstanding at any given time. Even if this is a full-time, professional business, lenders view borrowers who own more than four homes as a greater risk.

Rehab loans are just different

Getting the money to finance your rehab property can be a challenge.

Rehab loans are a different animal in other ways as well. Traditional loans typically fund only the property’s purchase — so that renovation money would still need to come out of an investor’s pocket.

A true rehab loan, though, generally covers rehab costs as well the property’s purchase. The loans are usually structured so that the overall value of the loan varies as the “after repair value” of the property gets closer to being reality.

To do this, oftentimes that portion of the loan that is meant to cover construction costs is held back in “reserve.” Then, those amounts are disbursed gradually, through “draws,” while the rehab work is being completed – similar to a lot of construction loans.

The lender may look for evidence of the completion of the repairs, so you may need to take photographs and obtain lien releases from your contractors as the work is completed. But at least “the shoe fits” – the loan is made for the investor’s type of situation.

Many online finance lenders focus on rehab loans

As I mentioned, smaller regional banks sometimes will develop good business with rehab investors.

Another alternative, though, are the new “peer-to-peer” real estate marketplaces, which are often focused on these rehab situations. The best of these companies (and I would count my own company here) make it their mission to use technology to make fix-and-flip rehab loans simple and fast. The application process can be straightforward and simple. Just provide a few key parameters – the location of the property, the purchase price, the rehab budget, your own income & net worth, and a few other items – and the technology should help take care of the rest.

These lenders can have capital ready for rehab projects nationally, using technology that provides not only competitive pricing and great leverage but fast and consistent answers. So don’t be misled into thinking that banks are your only — or even the preferred — finance option when it comes to investor rehab loans. Work with a smaller bank or an online lender that focuses on your kinds of projects — so that you can get financing promptly, and spend more of your time preparing for that next project!

Lawrence Fassler is the General Counsel of Realty Mogul, an online marketplace for real estate investing, and a registered representative of WealthForge, LLC, member FINRA / SIPC, through which Realty Mogul offers equity securities.
IMPORTANT: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. The experience of the author may not be representative of the experience of all clients, and is not a guarantee of future performance or success. Hyperlinks to sites outside of this domain do not constitute an approval or endorsement of content.

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