Owner-occupied rehab finance question - Posted by Bob (Md)

Posted by Frank Chin on February 17, 2001 at 06:41:18:

Sounds like you’re already in contract and the property needs rehab work before it qualifies for a conventional loan. My analysis is:

1- The seller would have the same problem selling to another buyer. That is, another buyer would not abe able to get a conventional loan either.

2- Talk to the seller about extending the contract and allow you to do the rehab during the contract period. You said you will pay for the rehab yourself. Tell him the place is in bad shape and the banks will not loan.

3- Since the property is not yours - and the danger is that seller could sell it to someone else once the place is fixed - have an attorney file a Vendee Lien. Also estimate the repairs (say $15,000) and add a clause to the contract calling for the the seller to reimburse you for the cost spent on repairs plus 20% as penalty ( total $18,000) if the contract is cancelled for any reason.

4- Get your conventional loan once the rehab is completed.

I have done the above on residential rehabs. I’m currently looking at a commercial rehab where the realtor suggested exactly the same thing, an extended contract (closing in 12 to 18 months) allowing rehab prior to closing. Becuase it is a much bigger undertaking with bigger risks ($150,000 rehab costs), I’m asking for a triple net lease arrangement during the rehab period instead. This would allow me to fix and rent out parts of the building as completed. Once the rehab is finished, I will purchase the underlying fee position.

But for residential rehabs, an extended contract with safeguards is good enough.

Owner-occupied rehab finance question - Posted by Bob (Md)

Posted by Bob (Md) on February 17, 2001 at 24:58:53:

I’m buying a duplex with the idea of living in it while doing the rehab. I’ve run into two glitches. Originally, I was approved for a 203k loan, but I didn’t like the fact that HUD forces you to use a government-approved contractor to manage the work. Seems like unnecessary expense. So, I decided to do a conventional loan and pay for the rehab work myself. But, the conventional loan programs are running into problems with insurance because the property isn’t in great shape starting out - it won’t pass a HUD inspection until a fair bit of work is completed. Any thoughts on how to get a 30-yr, low interest conventional loan in place on a property that won’t pass a HUD/FHA/FNMA-type inspection?

The other item is that I wasn’t aware of the 1997 changes where you have to live in the property for 2 years to be able to roll the profits into the next property without paying taxes on the appreciation. Am I going to be stuck living in this place for 2 years to protect my equity, or are there some creative ways to shelter the equity appreciation (like have a self-directed IRA own the property)?