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.