Rehab Loan Archives - Intrust Funding

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Before you start shopping for rehab loans, you need a plan to ensure a successful renovation of your investment property. Unless you work in construction yourself, chances are you will be hiring a contractor. This can be one of the most frustrating parts of the process. As hard money lenders we’ve seen perfectly legitimate investment opportunities turn into financial crises because of borrowers’ inexperience in choosing and managing contractors. If you’re new to this process, don’t worry! Here are a few tips for working with contractors successfully.

Contractors in today’s climate

Anyone that has flipped a home in our current market understands the trials and tribulations of dealing with contractors. The reality is contractors, and sub-contractors, especially the good ones that do quality work fast and efficiently, can charge a premium for their services. At the end of the day to ensure that your contractor is available to work on your project you may need to pay more and be somewhat flexible with your construction contracts, but time is money and getting a project finished faster means you earn more money.

Do your homework on contractors

Don’t just talk to one or two people. Talk to several contractors, asking for references and testimonials about their work and addresses of homes they worked on for other investors. Take time to do your homework and discover who has a great reputation and who should be left off your list. For instance, if your potential candidate works by himself, ask him how fast he can complete your job and make sure his time frame is realistic. Ask to see his current projects. Your investment property is far too important to take risks with someone who’s incompetent or has got himself in over his head.

Make sure you have a thorough contract

The contract should contain a lot of details including exactly what needs to be done, schedules, deadlines, amounts to be paid, and penalties for unmet deadlines. The more specific the contract, the more recourse you will have if something goes wrong. A contractor that can finish the project on time (and hopefully on budget) or even ahead of time will end up saving you thousands of dollars. This really adds up when calculating savings for monthly interest payments on a loan and loan extension fees.

Furthermore, understanding the draw process of your hard money lender is paramount to creating a strong mutually beneficial contract for you and your contractor. Ideally, you can build in incentives for the completion of work by certain dates, and identify penalties if those dates are not met, to cover extra carrying costs for insurance, taxes, loan extensions fees, and added interest payments.

Be careful about how you pay your contractor

If the contractor is asking for a large amount up front, it may be a sign that they lack the credit to purchase equipment or supplies. This could indicate credit problems or a lack of experience dealing with retailers and equipment suppliers. In that case, you may want to seek someone with more experience and a lot more flexibility in their ability to purchase goods. Every dollar spent should be accounted for and any overages should be returned to you. Beware of contractors who immediately spend every dollar you give them, but can’t show where the dollars went.

Be patient but vigilant

Rehabbing properties can be rewarding both financially and emotionally. However, you have to take an active part in the process. This means picking the right contractor and making sure they get the job done right and on time. Our loan originators at Intrust Funding would be happy to discuss any project you have and walk you through the process in order to help you fully understand the financial details to help you make the most money possible on your next deal. As hard money lenders, Intrust Funding and our loan associates are more than happy to share our insight on how to make your next flip a success.

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When deciding to rehabilitate a home, many factors come into play. The first and foremost is how to obtain the funds to finance construction. Many have heard the term “rehab loan,” but few truly understand the intricacies of the process.

Unless you are in the small range of people able to front all cash for a construction project, applying for a loan is a smart move. These loans can fund various aspects of a rehab, including materials, labor, and even the cost of the land itself! The downside is that they can be complicated to obtain since the money is being borrowed on something that doesn’t yet exist. Most traditional bank and finance institutions prefer assurances that the house can be built and/or rehabilitated on budget and on time. That means if you are planning to take out a rehab loan, make sure to have a basic construction schedule, benchmarks for progress, and end goals for your project to help streamline the process.

In all construction loans, money is disbursed by the lender based on a pre-established draw schedule, estimated money upon completion of the foundation, estimated money upon completion of the of rough frame, and so on. Because construction loans are typically interest-only, you pay solely on the money that has been disbursed. As progress is made, your loan payments grow and more money is released. When the home is completed, the total amount borrowed during the construction loan automatically converts to a permanent mortgage. Most construction loans are issued by banks, not mortgage companies, as the loans are typically held until the building is complete.

There are two basic types of construction loans available to investors looking to flip properties: one-time close loans and two-time close loans.

One-time close construction loans are most commonly used by investors. Also known as all-in-one loans or construction-to-permanent loans, this preference combines the construction costs for and mortgage on the completed project into one. One approval process and one closing make this the simplest option, while reducing closing costs. When choosing this type of loan, the borrower can select suitable terms from a portfolio of options provided by the lender such as 30-year fixed, various ARM’s (adjustable rate mortgages), or “float-down”.

A two-time close loan is two separate loans bundled together; a short-term loan for the construction phase plus a separate, permanent mortgage loan on the completed project. Because of the two loan settlements, closing costs on this type of loan are greater. On the plus side, you chance a better rate on the mortgage as refinance rates are typically more competitive than rates offered in one-time closing loans.

A rehab loan is a great option for investors looking to fix and flip a property in a short period of time. As hard money lenders serving Western Washington, Intrust Funding funds rehab projects every week. If you’re interested in learning more about this process or if you have any questions, just give us a call to speak with a professional loan consultant. At Intrust Funding, our borrowers are our partners, and our portfolio manager has a >98% accuracy on ARV projections. Our loans are the most secured in the industry, because our expert underwriting guarantees you are getting a good deal. Contact us for more information today!