Many Hats of Me: Financing the Imperfect Property - finding lenders for foreclosed homes that require repair

Friday, March 22, 2013

Financing the Imperfect Property - finding lenders for foreclosed homes that require repair

Last week, we closed on  first of two investment properties. Besides the effort of finding the properties (pouring over listings, creating spreadsheets, driving in high traffic, trudging through snow and ice, and freezing in sub-zero temperatures), we struggled with finding lenders who would finance our properties with a standard mortgage at a good interest rate because the properties were not perfect. 

For a checklist of what your will need to purchase a foreclosure property, please skip to end of this article,  Helpful Tips: Foreclosure Property Checklist. 




Background History




Blue House










The Blue House was a bank owned property that was sitting on the market for two months. The property was previously owned by an individual who had tried to sell it unsuccessfully two years ago, and had recently given up the title to the bank which owned his loan. Thus, the listing did not register this change of ownership, which was fortunate for us. We discovered this by looking up the property's tax record in the our county's government website.

You see, realtors are very familiar with what is on the market and it's sale history. This house was considered "difficult" since the previous owner did not negotiate with buyers, and by this time, largely ignored by realtors.

The ownership of the house transferred quietly to the bank, and the house's current MLS listing remained unchanged in the MLS system. Had realtors known that the property was now a foreclosure,  it would have generated interest in the property for two reasons:


  1. Foreclosed properties are attractive to both buyers and realtors, since banks are predisposed to price negotiation as the properties are a financial drain to the bank.
  2. New listings, or re-listings always catch the attention of realtors.


The day I toured the Blue House, we put in an offer 10K below asking price the following morning. It was accepted. :)

The Red House







We found the Red House on Fannie Mae's foreclosed property website, Homepath.com. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are publicly traded companies that are sponsored by the federal government. Both companies purchase mortgages from lending institutions, and resell them on the open market as mortgage backed-securities. By doing so, both companies provide liquidity in the mortgage market so that lenders have money to loan again (and again) to borrowers, like you and me. Without Freddie or Fannie, interest rates would be very high and loans too difficult to acquire, since lenders would have a limited supply of money to loan.

Both of these companies own foreclosed properties that they will market to the public. Fannie Mae properties are sold "as-is". Freddy Mac properties are move-in ready as they will repair a home before placing it on the market.

**Update: From my recent experience, Freddy Mac homes are now put on the market as-is without any renovations. Look carefully at the details of the listing and of course, have an inspection.



Financing Mistakes


To better explain our current financing, is to review our financing mistakes.

Mistake #1: Expecting Our Big Bank to Provide Financing







While we were researching properties, we thought we could be pro-active by asking our Big Bank for a loan pre-approval. We soon had a guaranteed interest rate for a month and an amount they could loan us. 

When our offers for both properties were accepted by the seller, we sent this information to our bank, and expected that our only task was to arrange for inspection and insurance, and then close. 

Our inspector found no glaring deficiencies in either home, except their roofs. Both were at the end of their useful life and would have to be replaced soon. 

Two weeks later, the bank calls us and informs us that they cannot finance homes that are not 100% move-in ready. I assured the bank that the roofs on either home were not leaking, but that they would need to be replaced soon. They would not budge from their position. They mentioned that I could try another division in the bank that provides renovation loans, but it was a lengthy process of a couple of months and the interest rates were much higher, blah, blah, blah. I didn't bother calling.


Mistake #2: Assuming Email is a Binding Agreement





We were introduced to a local small bank (let's call them local bank #1) who had a reputation of providing loans when others could not. Again, we sent our information, and the bank emailed us a pre-approval note with a great interest rate.

When it came time to sign the documents, the local bank suddenly reneged, and would not guarantee us an interest rate. They explained that Fannie Mae charges them a hefty fee if we do not close on the property, so they can only provide an interest rate after closing.

When we asked if we could have the best published rate when we close, they refused. I was shocked at the bank's about face, but there was nothing to do but move on. We couldn't risk continuing since the bank could charge us any rate it feels like with no agreement in place. It was now 4 weeks after our offer was accepted and we were quickly running out of time.


Mistake #3: Expecting Banks to be Logical




Albert Einstein



We walked away from Local Bank #1, so we approached the bank that actually owned the Blue House (let's call them Local Bank #2). It seemed logical (at least at the time) to approach the bank that owned the property. They were friendly, helpful, and after exchanging some information, were able to formally lock-in the interest rate for the Blue House. 

However, a week before closing...

Our Big Bank helped us get a line of credit to help pay for the repairs for both homes. It was under our newly formed non-corporate LLC. Local Bank #2 was well aware of this line of credit; however, they were unaware that it would be under our LLC. Two days before closing, Bank #2 informed us that they do not provide conventional mortgages to LLC's and they were unable to finance our loan. 

Wow.

Local Bank #2 explained that the mortgage would be difficult to sell on the secondary market to Fannie Mae. They insisted that Fannie Mae would reject this mortgage because we were PLANNING to use our LLC in our rental property business in the FUTURE. 

Huh?

The properties are under our personal names. The property's insurance is under our personal names. Our LLC is connected to a line of credit that has a zero balance. Furthermore, Fannie Mae welcomes LLC's to invest in their properties. I'm still trying to understand this bank's sudden refusal to provide us a loan. Perhaps they wanted the house back?!? 



We find a Lender for the Red House

Homepath Renovation Loan


When we rejected the terms of  Local Bank #1, I visited the Homepath.com website to see if there was financing information available. Here, I learned there are many banks that offer Homepath Renovation Loans. These are loans specifically designed for Fannie Mae Properties that require repair. The loan provides financing for both the property and the repair costs, so long as the repair costs do not exceed 35% of the property's appraisal. 

From the Homepath website, I searched for banks in my area and emailed all of them. Most of them responded, but their rates were very high. I was about to despair of finding a lender when I received an email from a bank that could offer me a renovation loan at an excellent interest rate. That bank was Colonial National Mortgage. 

From the start, Colonial was dedicated and responsive, which was a good thing because there was alot of work to be done before closing.

Formal Quotations from Contractors





Homepath Renovation Loans require the purchaser to find highly professional contractors that will repair the specific problems of the house. Our realtor, Rami, had already asked a roofer to bid on both the Red House and the Blue House and we had the quotation already. How easy, right? WRONG! 

Fannie Mae requires that contractors fill out a 5 page form and provide their personal social security number for a background check unless they are a corporate LLC. Do you think that roofer emailed a completed form to me? He didn't even call me back.

I've never had to repair a roof before, so I called the local lumber yard and asked if he could recommend a roof contractor. With no hesitation, he recommended a local construction company. I gave them a call, organized a time that week they could review the properties, and sent the form. In a little over a week, I had a bid on the roof and the form completed and ready for pick-up.







There were also few cracked windows in the Red House, so we asked Window World to bid. They reviewed the house at the same time as the construction company. Instead of bidding on three windows, they provided me with a bid to replace all the old single pane windows with new double pane energy efficient windows for an amazing price. They also had their form signed and completed. Things were looking up!


Paperwork, and More Paperwork


Even though I had managed to find the trades quickly, we only had a week before closing. There was still much to be completed: finding an insurer that could provide an umbrella policy for rental properties (this will be the subject of a future blog), the appraisal and the underwriting. Everyday, there were forms to fill and documents to find, scan, and email. I also had to provide an estimated rental income for both of properties, so I spent a couple of hours researching Zillow and Craigslist. 

We also managed to get an extension (for the closing date) for both homes. Since there is always a chance that a seller may not agree to an extension, I was very relieved when the extensions were accepted by both Fannie Mae, and Local Bank #2.



Closing Day



Both properties were supposed to close the same day. The first to close was the Red House, since Fannie Mae will only conduct business between the hours of 9 to 4. This means that your closing appointment needs to be at 1 PM at the latest. You'll see why soon.

The Shoe Drops




A week before closing, the Colonial Bank's underwriters requested that our roof and window contractors sign an eight page document. Scrambling, I call and email the contractors, and luckily, both of them were in town, and able to sign and return the forms within a few days. You guys rock!


The Other Shoe Drops





Two days before closing, Local Bank #2 backs out of financing the Blue House (as mentioned earlier). 

That evening, we decided that we could use our LLC's line of credit to pay for the Blue House by transferring the money into our personal checking account, and cut a personal certified check. 

We also contacted our realtor to ask her to arrange another extension for the Blue House. We didn't know for sure if we could arrange the money transfer from the line of credit to our bank account by the following day since we didn't have online access yet. 

More Craziness on Closing Day for the Red House


The day before closing, I emailed my personal banker at the Big Bank to cut me a certified cheque for the Red House. She called me and says not to worry and it will be ready that morning. Breathing a sigh of relief, I tell her that I will be there to pick up the check around noon. 

I met Rami to do a final inspection of the Red House. There are no surprises. On my way to pick up my daughter, I checked my email, and I had received an urgent message from the lawyer's office. Fannie Mae does not accept certified checks but only wire transfers. CRAP!

I picked up my daughter, who is very hungry since it's lunchtime, and drive quickly to the bank. I redeposit the certified check, and the bank arranged for the money to be wired.

By this time it was already 12:30 PM and our closing appointment was 1 PM. Before leaving, I called my business banker to transfer money from our line of credit to our main account, just in case we needed to close the Blue House that day since we didn't hear if our extension request was accepted.

My daughter was on the verge of crying since she was so hungry. We quickly ran out of the bank, swung by McDonalds, and made our closing appointment.



Fannie Mae's closing appointments must be at 1 PM at the latest since it takes time (approximately 3 hours) for the money to be wired from your bank to the lawyer's bank, and from the lawyer's bank to Fannie Mae's bank. This money must reach Fannie Mae before 4PM (or there will be trouble!)






After many forms were signed, questions were answered, and my daughter ate her lunch, the closing procedures came to an end. I asked our lawyer when would we know if everything was accepted by Fannie Mae. He replied, "As soon as they receive their money."

At around 4 PM that day, I called the lawyer's office, and they reported that Fannie Mae has received their money and had sent a confirmation. 

Sigh. One down, one more to go.




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