Rehabbing with Creative FinancingPosted on August 6, 2013 by
If you have looked at more than a few deals over the last year you have undoubtedly seen a distressed asset. Repairs needed, low occupancy, bad management (or tenants) are some examples, just to name a few. From single family to large apartment complexes there are distressed assets in all types of real estate these days. Fortunately they can be hidden goldmines if you know how to get financing. Most lenders are not lending on distressed assets, making it harder to close these deals, let alone mitigate the needed repairs.
My favorite way to deal with this is with a master lease option or seller financing. If you can get the seller to give you control of the property then you can do the fix-up and flip it for cash or keep it for cash flow!
Either way you structure the deal, the idea is to limit the cost of getting into the deal because you will have repairs and other expenses to overcome while you get the property cash flowing. Here are some tips for getting started with a rehab property using creative financing.
- Use any down payment money (or option money) to do the repairs with. You may want to put the cash into a 3rd party escrow account so the seller can see that the capital exists to do the work, but don’t give it to the seller. You don’t want to have to come up with a down payment and also money to fix the place up with. Let the seller know this could be in their favor, because if the deal doesn’t work out…at least they get a property in better shape than when they gave it to you.
- Know your time frames! Have a good idea how long it will take to do the work and how long it will take to get the property rented and profitable. Know how long it will take for you to sell or refinance the property once the repairs are done. You will want to take this amount of time and add 20%. This will be the minimum time frame you can accept for your creative financing agreement (MLO, seller financing etc.)
- Know your values! You should know what the property is worth in its present condition and what it will be worth once you fix it up. You can use comparable sales of similar properties to give you an idea. The overall price you pay for a deal will affect your exit strategy. Pay too much and you will have trouble flipping it or refinancing the deal.
Sellers who own distressed assets are sellers with problems. I have said this before and I will say it again “Solving other people’s problems pays well!!!”