Congratulations on taking your business to the next step. Today we need to understand renovation financing if we are going to get to closing. Properties need work and buyers can be picky. Once you have shown the buyer that a renovation loan is their best, if not only, financing option, how do you make the offer? This newsletter does not constitute legal advice and only gives this originator's opinion based upon seeing hundreds of renovation loans closed.
I am going to start by stating that on a typical bank owned property it is best to get the property under contract and then go back to the selling bank after getting estimates for repairs to reduce the sales price because of amount of work needed. If you try and get the estimates first, the property may be gone before you get your proverbial "ducks in a row". Also, the seller is more likely to make an adjustment once the property is under contract.
It is important to disclose to the lender that the financing is renovation financing for many reasons. Many REO companies are more comfortable accepting offers if they know that propeny condition is not going to become a factor in the appraisal process and by virtue the approval process of the loan. Also, renovation loans take more time then conventional financing and the REO company will need a reason to tell its investor why more time than the norm has been requested. Lastly, any loan originator that is worth your buyer's time will put the details of renovation financing on the prequalification letter that is supplied. You would want your prequal letter and offer to match. When writing the offer to purchase you will check off the applicable financing box (conventional, FHA, etc) and then write in 203K renovation for FHA, or Homestyle Renovation for conventional loans. From here you will start with your numbers. Here is a sample contract to look at, so if this does not make sense I am sure the contract will.
On a standard board contract you will put in the purchase price column the actual purchase price. Do not include any repairs here. On your next two lines you will put your initial deposit and additional deposit as you would on any other contract. The next line is where we list the proceeds of financing. Here is where you put the total mortgage amount including renovation funds. It is best to get this number from an experienced loan officer because we have to use the applicable Loan to Value here. On your next blank line you will fill in 'DEDUCT APPROXIMATE RENOVATION FUNDS' and place a negative number in the amount box. This will allow your math to consolidate back to the actual sales price on your TOTAL PRICE TO BE PAID line. I have found that an addendum or a cover page is also useful explaining that the loan amount referenced on the purchase and sales agreement is an estimate, because you have not received the estimate of repairs yet. This is something to discuss with your attorneys and your individual office managers.
Would you like more information?