How to Get the Most out of a Rehab or Construction Loan
A Rehabilitation or Construction loan is an adjunct to a mortgage loan that will assist the purchaser in buying a distressed property. This program called the 203k program is government-backed and enables the buyer to renovate the property and bring it up to market value. With this type of loan program, the rehabilitation portion of the loan is released as your contractor completes various stages of renovation.
This program is very popular in urban areas because properties in these areas tend to be older homes and typically need work. These properties are also sold at very good prices (well below market value). Note: With the revitalization of many urban areas around the country these days, the 203k program is an excellent program for first time homebuyers, as well as investors.
Note: Under the 203k program, to assure that the renovations are being executed in a timely fashion and up to local codes, the bank will send an inspector to the location before dispersing any money to the contractor. This protects all parties involved.
There are several benefits to acquiring a property that is distressed and in need of a rehabilitation or construction loan. Proceed with caution and follow these tips and you will be okay.
Distressed properties will be well below market value: Once again, the name of the game to real estate cycles is to buy homes with a lot of available equity. A house in need of desperate repairs fits this bill. You can take the neighborhood’s eyesore and turn it into a model home with a 203k loan or a rehabilitation loan. Make sure you work out a complete budget with your contractor so that you don’t use up all of your equity. Stay between the amount you paid for the house and the after repair value. Try to have 10% to 15% in equity available so that you can still profit, or pull out the equity in the future in a refinance.
Design the house the way you want it: By purchasing a house with a 203k loan or rehab loan, you will be able to design and personalize the house the way you want it. If you are going to live in it, imagine having a budget at your disposal to put in to the kitchen you want, or that Jacuzzi tub in your bathroom. Make sure that you and your contractor stay within local codes and obtain the proper permits.
You are able to make a change in your neighborhood: It feels good to take a distressed property and transform it into the gem of the neighborhood. Throughout NYC and Atlanta, I felt proud to drive around and see the difference that I made by renovating properties that were abandoned for years. Imagine making a ton of money and beautifying the neighborhood while you’re doing it.
Tip: Make sure you use an experienced contractor for your rehab project. Time is money. Interview all potential contractors and ask to review their previous work.
Set up a reasonable timeframe to get your rehab done in a timely fashion. The lender usually gives you up to six months to complete your rehab before your first payment.
Tip: Review the rehab being done and make sure everything has been done to code before you make your draw payments to the contractor. You do not want to pay your contractor and find out work was not done correctly.
Carl Agard is the Publisher and Editor in Chief of Boss XL Magazine and the Author of the new Book "Financially Surviving COVID19 (Finding Gems in the Real Estate Market)"