ReCasa Financial Blog

As though the real estate rehabilitation investor did not have enough
challenges, finding properties, good contractors, capital, tenants/buyers, etc. prior to the real estate crash, now they face the new frontier of real estate investing.   There are opportunities and challenges that investors must recognize and evolve in order to grow their real estate rehab investment business and ultimately build wealth.

• Large Supply of Homes – Daily we are pelted with news about increased foreclosures.  ( Foreclosure Market Reportreported “a total of 2,698,967 foreclosure filings were reported on 1,887,777 U.S. properties in 2011” ).   There are more options for investors and they should not be shy about making aggressive offers, focusing on neighborhoods that have a higher probability of future appreciation, or walking away from those that do not fit your profitable projects list.
• Less Competition – During the “Real Estate” boom, many “Newbies” entered the market looking for quick and easy riches in real estate causing property prices to rise due to a large number of inexperienced investors speculating on rapidly increasing values.  Now with all of the negative news, the new entrants have dwindled.
• Contractors – The slow down in the housing market, specifically new build, has resulted in a large number of qualified trades people looking for work.   This provides the rehab investor the ability to find good people at a reasonable price to complete the work.

•   Exit Strategy – Tighter underwriting for purchasers has limited the number of potential end buyers of rehabbed properties.   Many rehab investors have turned to “Lease Options” or rental of completed projects.  However, this option requires the rehab investor to obtain the permanent financing.
• Declining Prices –   Many markets are now in a declining real estate value market period, which a majority of us have not experienced.  Bottom line is that many of the “old” ratios, practices and models are now outdated.

•   Assume you will not be able to sell a property.   Will you rent, lease option, etc.?  Have permanent financing sources lined up due to the assumption that you will not be able to sell the property.  Non-Owner occupied financing solutions are more difficult to find in this environment.
• Get permanent financing loans closed when the property is “Appraisal” ready.   This gives you the luxury of listing the property for a long period of time and/or using the rental or lease option strategy.
• Do not list property on the MLS prior to getting permanent financing in place.    Listing the property for sale on the MLS may eliminate most, if not all, of your permanent financing sources.
• Maintain your credits score.   The ability to obtain any type of financing or credit is getting tougher.  The requirements are getting higher.
• Be prepared for full documentation loans.   There are very few non-owner occupied, stated programs available for borrowers, even if they have stellar credit scores.
• Increase your liquidity.  Lenders are now incorporating higher requirements for cash and marketable securities as part of the underwriting criteria.
• Think lower Loan to Values (LTVs).    Lenders are looking for lower LTVs for financing programs due to the volatility of the real estate market.  Conversely, investors should adjust their models to build in a higher profit margin to compensate for the volatility and the probability of a longer holding period.
• Sales comparables.    Gives the most accurate value metrics within one-half mile and six months. If necessary, engage an appraiser prior to purchasing property.  You must be comfortable that the property will appraise for a purchaser or for you if a refinance is pursued.