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Some home or multi-family properties in real estate may seem nonfinancial. This can happen for a number of reasons including title issues with the potential buyer or the properties. Unfortunately, these problems occur when an investor buys a property and then cannot sell it.
Let’s examine the common reasons that properties cannot be financed and what can be done. The most common problem is that the appraisal on a property is not high enough to cover the cost and expenses of the rehab. The investor often finds this out after it has completed rehab and has a ready and willing buyer to obtain a conventional bank loan to buy it.
In this same vein, the appraisal may come up, but the buyer may not get financing because of more stringent lender requirements – such as credit score, time on the job, recent foreclosure history or bankruptcy to mention a few. It may not be as simple as going to another buyer or just getting another appraisal, especially if this buyer has been denied by the FHA in the first place because the investor’s property has been under appraisal in the FHA system for at least six years. is “tainted” in form. month.
The simplest solution to credit issues and appraisal issues is to find private lenders or portfolio lenders to finance the sale. Private lenders are individuals willing to lend money that usually earn a certain percentage of interest from the bank. The investor should offer this person a 10% interest-only loan secured by a first mortgage on the property with a two- or three-year balloon note. This private lender can also get 2% to 5% as the endpoint on the loan and there can be a prepayment penalty of three months interest.
The following is an example of what the private lender would receive on a $100,000 mortgage: The buyer must be able to put 20% of the purchase price down to secure the mortgage in case of a market downturn. A lot of current home buyers have large deposits because they went through foreclosure and haven’t made mortgage payments for an extended period of time. $100,000 = $833.33 per month at 1% interest on a savings account versus maybe $83.33 at 10% interest at a local bank.
At closing, the lender will receive $3,000 to $5,000 in cash as an endpoint. If the homeowner refinanced during the term of the loan and paid the prepayment penalty, the private lender would receive an additional $833.33 x 3 months of prepayment penalty = $2,500.
The appraisal should be done by a reputable appraiser and the private lender should provide a title policy and insurance. A lawyer should draft all mortgage documents and do the actual closing to protect the investor/seller and the lender.
Using a private lender allows a buyer with faulty credit to purchase a home. It also allows the seller not to depend on the whims of a local or national bank that may be afraid to lend money in that neighborhood or on the market at that time. The investor should also contact portfolio lenders in his area to see if his buyer qualifies. Portfolio lenders are smaller private lenders that do not have the stringent credit requirements of national lenders. Most notably are credit unions.
Another major reason for being unable to finance is a title issue and the buyer’s inability to obtain a conventional loan on the property. If necessary, the investor may have to take what is called a “quiet title action,” which the courts ask to quiet any claims. This can take a few months to a few years, but is well worth the effort to sell a property at full market value and obtain conventional financing at that time.
In short, no matter how impossible it is for the buyer of a property to get the money, there are many ways to accomplish it, some of which are mentioned in this article. Seeking out defective title properties is a great way for investors to score great deals – all you need is patience and fortitude.
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