You Can Buy That Great Deal Fixer Upper
We’ve all seen them, that property that just screams potential. Maybe it’s the tear down with the ocean view or the leaning Craftsman that has personality, regardless of the property which calls out to you; it’s for someone else….someone with cash. Not so fast, even average buyers can buy that “great deal” by using a construction loan for financing.
Construction loans are not just for building a home from the ground up. They can be used for a variety of purchases. Construction loans can help finance the purchase and rehab of a foreclosure or any other distressed property. By following some simple steps, you can buy and profit from that deal just like the big boys.
Assemble Your Team
Regardless of whether you intend to buy the property as an investment or personal residence, buying a distressed property is a unique transaction and it’s important to have the right team working for you. Your team should include experienced real estate professionals who know how to evaluate, purchase and finance a distressed property using a construction loan.
1- Experienced Investment-Savvy Real Estate Agent
Not all agents know how to help you identify potential properties. The agent should understand the investment side of real estate and know how to provide carefully selected and appropriate comparable property values for a distressed home in its present condition and the future value once all renovation work is done as well as analyzing the cost per square foot of the renovation as compared to the value per square foot created.
2- Licensed Home Builder/Contractor and/or Architect
Before moving too far into the process, you have to have a solid home inspection. Get a contractor or two to evaluate the scope of the work and get advice from an architect or engineer if complicated foundation issues are involved and/or if you are planning on building an extension. These professionals are knowledgeable about how to evaluate the property’s systems: air conditioning/heating, plumbing, electrical, foundation, possible mold and much more.
3- Experienced Construction Loan Lender
Construction loans are different from typical home financing. The process includes steps not found in a traditional closing and having an experienced lender who specializes in construction loans can make the difference between a successful outcome and a disaster.
4- Select Your General Contractor and Architect (if necessary)
Unlike traditional home loans, construction loans include involvement by your building team. Once you have decided on who is going to do the work you’ll need to make sure that they are licensed and insured and they’ll need to supply detailed cost estimates for the lender to approve.
Using The Construction Loan – How Does It Work?
A construction to permanent loan consists of two parts; the financing for the actual purchase/refinance and construction/rehab work followed by the permanent mortgage loan which will take effect once the project is completed. The loan amount is disbursed at regular intervals during the construction process. As each milestone is reached, the lender will inspect and disburse funds. This is called a draw. The schedule is agreed to in advance based on input by the buyer, lender and contractor.
Can I Afford and Qualify For A Construction Loan?
Lending guidelines have tightened since the housing market collapse. Lenders are more careful about how they qualify borrowers and the risk associated with the loans. A construction loan is a riskier loan as the lender does not have a completed structure as collateral. Yet buyers with good credit and a down payment will find that qualifying is easier than they think.
Construction loans are based loan to value ratios just as in conventional mortgages with added twist of loan to cost consideration. Depending on your qualifications you can finance up to 90 percent of total cost of acquisition and renovation expenses. The lender will also require cash reserves that are higher typically than a traditional home loan. The reserves provide a cushion for unforeseen issues or a longer than expected gap in disbursements from the loan.
What Properties Qualify For A Construction Loan?
Properly packaged, virtually any property can qualify for a construction loan. Unlike other rehab loans, there is no minimum or maximum amount of money that you can borrow, depending on your qualifications. Construction loans can be used to finance/refurbish:
Tear Down Properties
General Fixer-upper properties
Partially built homes
Homes abandoned during a remodel
Dated home – total remodel/partial remodel
A construction loan can be used for most any property which does not qualify for traditional financing. The lender is not looking to approve the home itself, but will carefully look at the contractor, the building plans, local ordinances, CC & Rs, and line item cost breakdown. Builders often use a “blue book” to detail the project for lender review. An appraiser is also employed to assess the future value of the property.
Investors and cash buyers have been able to capitalize on the distressed property market. Paying with cash or private funds is not the only way to buy and refurbish a distressed or foreclosed property. If you spot that perfect tear down on the lake, give it a second look, then find an experienced team who can help you navigate the process of getting a construction loan and make the dream a reality.