As published in Scotsman Guide's Residential Edition, November 2010.
Many investors are trying to find ways to acquire distressed homes from real estate-owned (REO), foreclosure and short-sale inventories without stretching their cash too far. The longer the loan-modification, foreclosure and REO processes take, the more likely distressed homes show signs of neglect. Investors who pay for more repairs than they expected can find themselves facing financial limitations.
Many of these investors are reluctant to buy until they understand potential legal and construction risks. In some cases, they don't want to invest before homes are ready for resale. Mortgage brokers can fill a vital role in providing greater leverage and expertise for investor clients by investigating the world of rehabilitation financing.
Distressed properties may require additional work to be ready for resale -- from structural work to legalizing additions. Increasingly, experienced private-construction and rehabilitation lenders provide not only additional funds to cover rehab costs but also expertise and oversight that may comfort investors. With these specialized lenders, investors may find their cash outlay similar to a straight acquisition of the property because the lenders have created protections that ensure the rehab funds go right into the project.
Brokers with investor clients seeking distressed homes should learn about the additional expertise required to get rehabilitation financing. This will allow them to keep up with their clients' financing needs. Asking the right questions of rehab lenders can save brokers and their clients time and money.
Some of the questions brokers should ask lenders include the following:
How many rehab loans have you originated?
How do you verify my client's rehab-cost estimates, expertise of the contractor involved and viability of the project?
What are the interest rate and costs for the loan?
How will you disburse the funds to the borrower or the contractor?
How long will disbursements take?
Do you use professional inspectors, fund control and mechanic's lien title endorsements?
Brokers should pursue these questions and make sure they receive clear, consistent explanations from potential lenders.
A rehabilitation loan with the cost and disbursement controls that many lenders desire can enable investors to put forth about the same amount of cash they normally would on a straight acquisition.
With this knowledge, brokers can encourage investor clients to broaden the range of homes they will consider buying. Brokers also should work with a reliable lender, fund-control company or inspector, and title company to ensure investor clients minimize their risks and turn homes over more quickly to increase profits.
Mark Mozilo is a managing member and lead underwriter of CalCap Financial. He also is a principal of CalCap Advisors Inc.
Since 1986, Mozilo has been involved in the mortgage business and acquisition of land and apartment units. His experience includes working as CEO and executive vice president at IndyMac Bank; founding the mortgage-banking firm, Keros Mozilo Mortgage; and six years as a regional vice president at Countrywide Financial. Reach him at (626) 229-9056 or firstname.lastname@example.org.