As the banks continue to take back properties, buying distressed, bank owned properties and reselling them continues to be a hot business. As a facilitator of rehab financing, I work with a lot of rehabbers in the California area. Generally speaking, those who are the most active tend to target the entry level market.
There are a number of reasons why this may be. For our purposes, the sale of an entry level home once it is rehabbed tends to be quicker than the sale of a luxury home or a step up home. Many people overlook this aspect when going in, but it is important to consider. Every day spent holding a property cuts into profit as loans require debt service. At double digit interest rates, this can add up quickly, especially on a higher end home.
Another plus to working with the entry level homes is the rehab budget. Typically speaking, an entry level home is not going to need the upgrades that a higher priced or luxury home is going to need. This cuts down on the cost to actually rehab the property to the point where it will sell for a profit. This is not to say that there should be no upgrades, but the cost of upgrades at the entry level to really make a home pop when compared side by side to other entry level homes is usually not the same cost burden you would need to upgrade a luxury home to make it stand out from the crowd.
When financing these types of transactions, we typically are financing based on the after repair value of a home. This value is very important, not only to us, but to the borrower as well. It is common for our loan amount to be equal or greater than the purchase price of a property, but this does not mean that we can finance all of the costs. This is due to the fact that we are going to have a fund control account set up for the work to be done and an interest reserve account set up to cover the debt service for anywhere from four to six months.
If you would like to learn more about our lending or rehab loans, please visit our hard money home page.