ARE YOU READY FOR A REHAB AND ACQUISITION LOAN?

by Team IWP! on 21. Apr, 2010 in How to buy foreclosure, How to invest in real estate, Investing for Beginners, Lending, News

If you listen to all of the Real Estate “Experts”, there has never been a better time to invest in Real Estate. Prices are 20% – 30% lower than they were two years ago. The MLS has a large number of two unit brick buildings on the south and west side of Chicago for as little as $19,000.

What the “Experts” aren’t telling you is that property may have extensive rehab work needed and it is better left to the seasoned investor with plenty of cash on hand or has the ability to take out a loan to rehab the property. Here is where it begins to get interesting!

As recently as three years ago, all an Investor needed to obtain a rehab loan was a heartbeat and the ability to sign his name. There were a number of lenders that offered so-called “hard money” loans. You did not have to prove your income or ability to pay back the loan. Most of those companies are no longer in business or have stopped writing this type of loan for the near future. There are still a select few companies that will finance a rehab project. The criterion has changed to qualify for this type of loan.

The first thing an Investor seeking a rehab loan must know is that full documentation will be required. This consists of two years tax returns (2008 and 2009), two months complete bank statements, and two recent paystubs. That is right, you have to be employed or provide a profit and loss statement for those who are self-employed. A lender will also require a middle credit score of at least 680. This is important because most of these loans are short term and must be refinanced. The end lender wants to see “good” credit. Debt to Income ratio is being reviewed and anything over 45% with the anticipated loan will probably be declined. Erase the term “Hard Money” or “no doc” from your vocabulary. These type loans no longer exist. With all the recent bank failures, no lender is willing to take the chance of being investigated for not having complete documentation.

For the Investor’s that can provide current documentation and have at least 10% of the requested loan in the bank, there are loans available to purchase and rehab or for just funds to rehab. Make sure you have your exit strategy, including an end lender in place. Your documentation should be loaded on your computer in a compressed file for easy routing to your lending source. Be sure to update the information with current paystubs and bank statements. Have statements ready to explain any adverse information on your credit report or bank statements. You can get one free report each year from the major credit reporting companies by going to www.freecredit.com. You will have to pay for your credit score but it is worth it. Getting pre-approved is necessary in order to submit a contract so be approved before even finding a property.

All investor’s should have a blueprint or business plan. In this market, you will probably have to hold onto the property and rent it out for a few years. The potential for a positive cash flow is much greater now than it was a few years ago. Being a property owner is not for everyone so either be ready to assume the many responsibilities that come with being a property owner or plan to hire a property manager. Your “plan” should also address your contractor, insurance, and an attorney specializing in Real Estate. Be prepared to update your plan on a regular basis. The most important thing is to be prepared to be involved with your project. You will be paying back the loan while you are still working on your project so remember that time is money. Once you have everything in place, it is time to ask yourself, am I ready for a rehab and acquisition Loan?

Gyna McElwee has been in Real Estate for over 15 years as an investor, Real Estate Agent, Consultant, and rehab loan originator. Gyna may be reached at gynamcelwee@yahoo.com for information on rehab loans and consultations.