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The Truth About REHAB......

I have wanted to write about this subject for awhile. Now before I go any further, I should point out that the Rehab I'm talking about has nothing to do with any addiction. (I know, you are so disappointed and the title was such a tease:-). This has everything to do with newbie and/or seasoned Real Estate Investors who seek to buy properties and then Rehab them for eventual resale.

Here's a concrete example of a typical and very doable Rehab Transaction...

Customer is buying a distressed property for $45,000. He believes that he can fix it up to salable condition for $46,000. When the property is done, it should be able to sell for about for $180,000. (Based off of an After Repair Value Appraisal)

In this case... we are loaning the borrower $96,400 which is 54% of 180,000! (I can lend up to 80% of the ARV value if that is needed)

In other words...

We are giving him:

	the 45,000 to buy the property
	the 46,000 to fix it up
	plus any money for closing costs... (no cash in your pocket as I also mention below)

He doesn't need any of his own money!!!

A few notes in regards to these products:

- After the property is brought up to par, you can immediately sell or refinance to get cash-out. If you chose to do a cash-out refinance, make sure you contact a Mortgage Company whose Investors don't have seasoning requirements (having to hold onto a property for 6 or 12 months after buying it before you can take cash-out).

- Currently, with these Rehab Loans, you can't put cash in pocket on this particular product unless you refinance after the fact.

- Minimum Credit Scores are generally required to be 660 and you must be able to fully document your income to qualify for the loan.

The thing that isn't often mentioned with Rehab Loans is the real value. Sure, you can make a pretty good living doing these deals as a Real Estate Investor, yet there is another very tangible benefit deeper than just financial rewards. Revitalizing properties help the growth and health of the community. It's a Win-Win proposition and that's what any successful Real Estate Transaction is all about.

For more information on Rehab Loans in Pennsylvania, feel free to email me or give me a call.

Jason Sardi

First Choice Equity Group Inc.

Mortgage Consultant

610-439-2166 ext. 229

jsardi@fcegi.com

Posted by Jason Sardi, Mortgage Banker on 01/10/2008 01:22 PM

Comments (42)

pennsylvania investors, rehab loans, flippers, lehigh valley homes, pennsylvania mortgages, no money down

Originally posted at: Real Estate Financing...: The Truth About REHAB......

42 Comments on The Truth About REHAB......

JAN

2008

Good to know Jason. I did like the title ;-)

Now that is some great info on rehab loans. I really didn't know much ... A couple of years ago my mom stopped up the street to look at a house. The door was cracked open so she walked in (I told her to never do that again!) and almost fell through the hole in the floor (termites). Later on I saw a sign on the front lawn accompanying the RE firm sign and it said "Construction Loan through XX mortgage co. available". Is this similar?

Jason, this is great info. I wish more and more investors would look at the rehab loans.

Karen - Thanks! I always love a 'provocative' title.

Sis- Sounds similar, yes. Depends on the actual condition of the property.

Danny - That's a fact. Some areas are just perfect for this type of loan.

They tried to hide some stuff "cosmetically" but with my mom almost falling through the floor...... I think that tells a lot :)

Yeah, if you are almost falling through the floor....the property may need some 'tweeking'.

Jason...That was news to me. Thanks for the Rehab loan education...and thanks for keeping it simple....so I could follow it!

Monika - I'm glad to give you something new to chew on.

Excellent info, Jason. Learn something new every day.

Now, if only people in my area (vacation/resort) would realize that it's downright next to impossible to buy something other than a teardown for $45,000...even the trailer homes (not campers) that are that price are crap....LOL

Karen - Different areas will dictate how beneficial this product will be in accordance with the market. A good example is in Wilkes Barre, this is the perfect product for Investors who are buying property there. Wilkes Barre is a very good area for Real Estate Investors. I know what you are saying though, in The Lehigh Valley you'd be hard pressed to find a property in the price range example I used.

Jason,

Good post!

I'd like to know more about the program you're offering.

As you know I teach "Flipping" I have a problem with people who think all "Flipping" is rehabbing, it's not! Rehabbing, anything more than clean up and slight redecorating makes you a contractor. Whether professional or armature contracting is a spectialy that should not be mistaken for investing! Rehabbing is a job, weather or not you personally swing the hammer.

I'm all in favor of rehabbing if you know Constitution! I'll even include rules 1 & 2, for rehabbers.

1. The profit is made at the purchase, you've got to buy right!

2. You need allot of money or a great lender.

Keep up the good work!

Bill

Jason,

I'm not sure about the program but I would touch on something you mentioned..my biggest sticking point is the seasoning of the loan issue. Of course the bank will want to justify why they paid lets say $91,000 in essence after repairs plus they are probably into it for a few more dollars for maintenance taxes etc. I am aware of this from first hands on experience. I have a bough a few properties over the last years for investment purposes ...I rented and held a few and some I .....lets use the word turned over a few quickly f you understand my pun. We had a few like this that were able to close within 3 months.

We have had a few rehabs and we used cash so there is no argument there.

Excellent post and very timely. As you know, I had a 'rum lunch' with my AR girls today, Sarah Eubanks and Sara Goodwin, and I read this to them so we could discuss the relevance of this type of product in our area. They brought up some excellent questions, which I promptly forgot and blame on the rum ;-) All Sara's fault!!

Jason..One of my Investors is neck deep in 3 projects, wants me to help him out of his financial hole..Its difficult to buy and rehab into a declining market..My advice to him was to let us handle his investments from now on, luckily he still has a pile of money left...As William stated above, its all in the buying..we could make a list of whats important in rehab

Don't pay to much when you purchase
Pass, pass, on deals that don't cash flow on paper
Get a real home inspection so that you can alter your bid accordingly, and then drop you bid even more.
Remember, if all else fails, get help from a person that can prove they have done this successfully many times before, its all in the buying, and you need help to get all the details of the deal on paper to make sure you pay the right price when you buy.
Last, but not least, take all these plans to your lender, Jason Sardi, and he will give you a loan and a Gold Star!

Bill & Mike Norvell Sr. - Thank you so much for your informative additions/insights to this post, I hope others who may come across can learn from your experiences & knowledge. And Mike, Sardi doesn't give Gold Stars....typically:-)

Jennifer - Ahhhhh....that rum thing. Personally, I stay away from the stuff....it gives me a tad bit of 'Memory Loss' as well. Would love to hear and explore the questions....an old psych trick would be to feed you more rum on a different occassion and bring up the subject matter again, odds are you may remember:-)

Neal - And in my experience, a smart lending instituition will ask the question, "Why should we use the appraised value rather than what it sold for to lend against in such a short amount of time?" It should has to make sense, very few Sellers are that charitable with equity.....

Jason, Excellent post and information!

Jason - typically sardonically wonderful. thank you for the overview and insight into these products. I may be an old dog. I may be comfortable on the porch. Occassionaly, I step off and learn a new trick.

Jason... Nice easy example for entry level investors to follow. Wonder how much inventory exists in that price range...

JAN

2008

Jason, This is great post! Would it also help the file if you have done this before? I have people who call me and have never even done this before and not licensed and believe they can do all the work themselves.

Jason - you are right, Wilkes Barre, Scranton, and even Carbondale is a good place to get good deals that would work for this. Carbondale may be a bit higher than Wilkes Barre, but it's so drastically different than Lake Wallenpaupack prices that it's like another world.

Carbondale needs serious revitalization. It has a lot of old homes with character that need a shot in the arm.

Good Points, Jason. What folk should look at is the percentages you quoted. Most Investor's in the Washington/Baltimore area won't look at a property unless ARV < 65%.

Marc - Thanks my friend, I'll see if these particular investors also do those loans in your area.

John - One of the things I learned and excited me about this business from day one is that you learn something new everyday....

Dan - Depends on the area, as you move west in Pa....the inventory tends to be greater.

Matthew - Actually, one of the investors allows the person who signs onto the loan to do the work...as long as they have the credentials. For those who are about as competent in repairs as yours truly, a Licensed Contractor is required.

Karen - Good points! I am going to try to get the word out with Real Estate Investors interested in areas such as you pointed out. Revitalization is the 'not so hidden value' of these transactions.

Mattew Rosov- I'm assuming you mean rates....I priced a deal recently at 75% at 8.375% (no pre-payment penalty). I thought it was a heck of a deal and with that particular investor's exit strategy, it didn't matter if the rate was 14%....they weren't holding it long enough for it to really matter.

I think most investors are looking to make the money...i'm not sure all of them are doing it for the growth of the community because f they were they wouldn't have gone crazy and now get stuck with something they can't sell. I'm just guessing.

JAN

2008

hmmmm 660 score? I learned something :) Thank you! I'll remember this - and where to find you!

JAN

2008

M.B. - You are probably right but I did want to point that out as just another benefit of these transactions.

Kim - Thank you for stopping by, I'm not that hard to find:-)

Jason - no, After Repair Value. if the ARV isn't going to be below 65%, these (rather savvy) investors just aren't interested in the deal!

Ahhh, got ya Matthew. Thanks.

I wonder how useful that would be in areas where land is so highly appreciated that the margin for profit is very slim... The house is almost inconsequential compared to the land unless its a McMansion.

These used to be "easy" because of LTV/CLTV allowances. With that window reduced, finding properties and projects where this actually works is harder and harder. Thanks Jason!

Sardi,

Interesting and great topic to post about.

JAN

2008

Ruthmarie - In certain areas, this particular product would certainly not be as useful as in others. Real Estate is local....not national.

Rich - True to some extent, easier in some areas versus others. Finding the deals isn't the easiest of tasks but can reap very fruitful rewards.

Gary - Thanks, haven't saw this subject matter come up much.

Oh shoot, Jason - I though you were getting some help for your problems LOL

Who are you kidding Kathleen:-)

Jason -- thanks for the info. I have a few clients who may be calling you for more information after I send them the link to this article. Heck, I just may call you myself...

Feel free Rich! We probably should talk sometime.

JAN

2008

Jason- this was a good read.....I had no idea about this type of loan as I don't work with Investors.....so glad I found this, now I am just a tich wiser for the new year :)

JAN

2008

Kathy - I love dispersing my grand wisdom:-)

Jason - missed this when it first came out. Good information and it's much appreciated.

cheers

Back at ya Gary!

JAN

2008

Jason ~ I am a bit tardy in getting to this one. A mutual "friend" suggested that I read this one and perhaps even comment. In our neck of the woods, rehab loans certainly have their place. however,with the cost of housing being so high, we often cannot justify the programs. Good post,and from what Jennifer said a great one localism style! Keep us posted...

FEB

2008

*UPDATE*

The Investor just introduced changes to this product. They now require 5% of the borrowers own money into the transaction for Investment Properties and 3% down for Owner-Occupied Properties. That said, the pricing and rates are more appealing than before, it's just that you can't do it with no money out of pocket.

Jason,

Thanks for writing this; I've featured you in this week's Mortgage Pro Week In Review--1/28/2008 Through 2/03/2008

Mike in Tucson

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