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Buying Bank-Owned Properties: When Homes Need Repairs
Real estate buying activity in Sacramento is highly concentrated in the foreclosure sector. Makes sense. Buyers want the best deal they can get, and bank-owned properties appear to offer the best chance for that. But financing those REOs isn’t always easy, especially as shrinking bank liquidity pulls the lending noose tighter.
The Problem with “As Is” Sales
Many bank owned properties have been abused or poorly maintained. The banks who now own them would prefer to sell “as is” to avoid throwing good money after bad. But you can bet those same banks wouldn’t finance those homes now if asked. Prices are even lower if the bank hasn’t had to spend money on fix-up, but securing a loan on a roughed-up property is a growing challenge
Traditionally, lenders are concerned with two categories of repairs: habitability and health & safety issues. Conditions that impair habitability include kitchens lacking appliances or cabinets, non-functional sink or toilet fixtures, damaged or removed flooring, or a leaky roof. Health & safety issues are self explanatory but can include even minor items like missing electrical outlet covers. Banks have always required that these items be repaired prior to close. But it’s getting tougher as banks balance sheets dry up, leaving them extremely vulnerable if they originate a loan that cannot be sold off immediately in the secondary market.
A Few Possible Solutions
Here are a few ways to deal with this challenge.
April 19th, 2008 at 8:30 pm
If the house is purchased at a significant discount to “after rehab value,” the would-be homeowner can get a “hard money loan” to (a) purchase the property and (b) also borrow fix up money.
Upon ownership, the homeowner would fix the property to bring it to (a) minimum standards for health and safety and possibly (b) neighborhood norm.
Then the homeowner would refinance the property to (a) pay off the hard money loan and (b) put a market interest rate in place.
A potential problem with this strategy is that (a) interest rates may be higher after the homeowner has fixed up the property; or (b) there may be seasoning issues and (c) the homeowner’s circumstances may change, thereby rendering him/her un-financeable.
Using hard money is a viable strategy but, in the current chaotic marketplace, not a guaranteed successful one.