Financing Rehabs for a Foreclosure Investment

The market is currently flooded with a plethora of foreclosures and a plethora of opportunities to get a foreclosure investment..  These foreclosure investments include a wide variety of properties.  Some of these of these homes are in excellent shape an only need minor maintenance to re-sell quickly.  Others are suffering from damages and require repairs to bring make them attractive buys.  But don’t fret the these damaged properties are typically offered a significant discounts making them great deals for investors who specialize in rehab flips.  These smart investors buy distressed properties at deep discounts so that they fix them up, and then sell them for nice profits. If this is what you are looking into then keep reading to find out how to finance the repairs on these properties.

Unfortunately traditional banks typically don’t include the cost of repairs within the mortgage for your foreclosure investment needs.  In these cases you need to look elsewhere for that type of financing.  You would typically want to look to that of a rehab lender. Rehab lenders are more heavily concerned with the value of the property after it’s repaired, and weigh less on the properties current presentation. Most rehab lender will lend btw 50% to 60% of the properties after repair values.  They also typically like to see you put down 10%- 25% of your own money which is based on the total cost of the property with repairs, not the purchase price alone. 

An example of this process works would be foreclosure investment that has a purchase price of $100,000.  If the rehab cost are $100,000 then the total cost of the property would be $200,000.  If the after repair based on recent comparables is $310,000 then the after-repair value is 60% of the loan-to-value ratio of the house.  The lender would almost certainly approve a rehab loan of $100,000 to repair this property.

I know that sounds like a great deal but be careful.  If you end up over spending on repairs and need additional funds to complete the repairs, your request may be denied.  If your request is denied than you must find a way to come up with additional money to complete the repairs on your own. 

Another thing to keep in mind with rehab loans is that they are typically short term and carry a higher interest rate.  The interest usually ranges between 8%-12% and the closing cost are can be between 3%-5% of the loan amount.  Rehab lenders term usually last between 6 and 12 months so before every getting the loan plan your exit strategy whether that be selling the home a refinancing into a traditional mortgage.

In your looking into rehabs and a foreclosure investment it’s best to secure rehab financing prior to looking at traditional financing.  If you’ve done all your homework and completed the necessary research, investing in rehab foreclosure flips can be a lucrative side business that can produce excellent returns for you.