Finance Roll

For rehabbers, finding construction financing can be even more difficult than finding the right property to buy. Banks and most other lenders have many rules and regulations to follow. Most offer nothing more than conventional mortgages. Some offer home improvement loans, but one requirement is that the borrower is living in the house. Of course, the real estate investor could not meet that requirement.

Flipping houses quickly for profit creates even more red tape. Some banks require additional appraisals on property that is resold quickly. In some states, they are required by law to do so. In addition, the state of the economy affects how many loans a banker is able to make. When the economy is bad, they approve fewer loans. Because of the problems that the banks have had over the last several years, they are making fewer and fewer loans.

So, construction loan financing that can always be hard to find is even more elusive right now. As a result, private lenders are becoming increasingly popular. At one time, the private lender was considered a last resort. Often referred to as hard money lenders, they provided funding to individuals that could not borrow elsewhere. Now, the majority of the loans that they make are to real estate investors, not because the investor can not qualify for a commercial loan, but because the terms that the private lenders offer are more appealing.

Real estate investors usually need purchase and construction financing. If they turn to the commercial banks, they will need to take out two separate loans, doubling the closing costs and the interest. Closing the initial loan takes at least a month. Closing the second loan will take additional time. All of this has to be completed before the repairs can begin. The rules that the banks follow are the same, regardless of the deal that the investor has been able to make.

Private lenders look at loans on an individual basis. They still have guidelines that they follow, but if the borrower is able to show that the after repair value will exceed the purchase price and the cost of repairs by a good percentage (at least 35%), then they can make the loan for the purchase and provide construction loan financing. They can close in as little as two weeks. The total closing costs are less and if the ratio of the loan amount to the after repair value is below 65%, they can even roll in some or all of the closing costs, reducing the borrower's out-of-pocket expenses.

Not every lender offers the same deal. So, it may still take a little shopping to find the best source. But, generally speaking, obtaining a loan from a private lender is easier and faster than dealing with the banks. If you are a rehabber, you will be able to insure that you have adequate cash flow to complete your current project and work on others at the same time. The bottom line is that private funding is a good choice for rehab construction financing. You might want to give it a try.