Wednesday, August 13, 2008

Rehabbing an Old House Step 4: Financing

Rehabbing an Old House Step 4: Financing

This follows Rehabber Manual Parts 1, 2, and 3

Probably the trickiest part of doing a rehab is financing. It's tricky because you're essentially financing the future value of the home. There's a lot of risk in that. After all, you're likely buying a property that's in pretty rough shape. Maybe even a derelict. Many will view it as worth more torn down. Not us, but you know what I mean.

Who's going to loan you $100,000-$200,000 to turn that into home sweet home?

Well, a lot of places, actually, but not without a lot of strings.

The typical loan is a construction loan, or some sort of convertible construction-to-traditional mortgage. They aren't going to just give you $100k and say, "There you go, now go to work!"

The way it works is you give them a point by point estimate of what you intend to do, they get an appraisal based upon that, then as you do work, they hold back whatever it will take to complete the job and give you the rest.

What that means is that in addition to coming up with a down payment, you're also going to have to finance significant chunks of materials and labor before you get cash from the bank. If you've got that type of cash, great. You're set. Many of us are doing rehabs in the first place because we're not quite that flush, however. Sure we've got reserve funds, but coming up with $10,000 on the fly really eats into one's liquidity.

There are work-arounds, however.

First, thing to do is clean up your credit. You need pristine credit. Get your credit report. Sign up to get regular reports from at least one of the reporting agencies. Dispute anything you don't know or do think is accurate. EVERYTHING matters. Lates, delinquents, defaults, inaccurate information about you. There's lots of resources for leaning how to clean up your credit report. This outfit, the Credit Info Center has a ton of stuff.

Once you have a great credit score, it's time to arrange for you loan. Once you get approved, then you will want to add a bit of low interest credit if reasonable (check with your banker about what's OK to do and what may interfere with your pending mortgage--this is not financial advice--double check everything with a trusted pro). This is what we did. 0-2% card offers are plentiful these days and that can really make things work easier when you're at Home Depot buying $1000 worth of lumber. Also, various vendors will open up accounts for you. If you can finance, say, your windows or your roof for "12 months, same as cash", then you've got some breathing room and can then get a draw from the bank which you can then use to pay, say, your plumber or your HVAC guy.

In addition to these methods, don't forget to check with your local municipality regarding financing incentives and grants to do renovations (historic and otherwise). Often there are tax credits available too. Many cities are trying to get properties fixed up and are willing to give you low or no interest loans, or even cash grants just to live in a place for 5 years.

When you're in the process of looking for a good candidate, make sure you call the housing departments in the areas that you're interested in. Ask them if they have any programs or incentives for rehabbers.

In some cases, city financing can be subordinated to bank financing which makes a bank feel a whole lot better about putting money into a project. In fact, in some case it can make the deal.

Take your time and make sure you understand all the contingencies and workings of any financing deal you do. Take great notes and keep good records. You'll be referring to them all as you go through the process. If you do your homework, and take your time, you won't have to worry about predatory lending or emotional manipulation. If a financing deal doesn't make sense, ignore any pressure tactics and be ready to walk. Nothing is so urgent that you have to close a loan "right now".

Wifely edit: Also know that many municipalities are buying up derelict properties (or confiscating them for delinquent taxes.) They have a vested interest in getting these properties back onto the "I pay my real estate taxes" side of the city ledger. I have known city owned buildings to sell for $1. No, not a typo. $1. The first thing to do is find them. Contact your local Housing Development Department and ask about city owned properties. They'll likely have a list you can take on the road for a self-guided tour.

Back to Step 3

On to Step 5

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