Financing a Short Sale with Repairs in IL

10 Replies

Full disclosure I am a short sale newbie.  Situation: I found a deal in my area, far north suburbs of Chicago, and was planing to fund it via a conventional mortgage live in it for a couple of years and depending on the market either flip it, take the proceeds and do another or rent it. Well I have now come to find that it is a short sale and when I looked at the property it had a recent sump pump failure and the carpet and dry wall in the basement now have mold.  Not a big deal in my book and the conventional mortgage that I was going to use to fund the deal will not fund until remediation by the seller or bank, and we all know that will not happen. Other information: There may be more as the inspection has not yet been done, this is all that I saw. the listing agent has said he will approve holding the inspection to be done within 5 days after the bank approval.  I am aware of the extended time short sales can take, and that is not a concern for me.  

Part 1: My question to all of you is simple (I think). Is a FHA 203k loan my only option? It seems to be the only one that is being offered. I have never had one but it sounds like a big pain to deal with and I don't like not having control of my funds for my rehabs. My understanding is draws are given by the bank from escrow (that I'm still paying on) and someone else decides when it is paid out. It sounds like a bottle neck for everyone involved.

Part 2: If the 203k loan is the best option, can I only fund what I need to get into the house, in this case lets assume it is just the mold remediation, or do I need to fund the whole project this way?  The house does need updating throughout, paint, landscaping, etc but it mostly cosmetic nothing that would keep it from being lived in and things I can mostly do myself.  

Thank you for your time and expertise!  


There are conventional loans that will let you roll in rehab money.  Home only needs to be livable not fully renovated.  No holes in walls, stove, working ac and heat.  Gmfs sells a 5% down renovation product, the financed repairs do need to be done by a contractor, no changes on this to other contractors so choose wisely. If gmfs is not in your area check multiple lenders.  Try to find lenders that do in house underwriting and have a renovation product.

First thing you need to figure out (other than the mold) is your price. Has the bank officially approved the price you think you are paying? Generally agents list a short sale at an attractive price (that is not yet approved by the lender) to suck in buyers. 

If it is not approved, you may be in for a long process.

Originally posted by @Steve Smith:

@Ron S. Like I said short sale newbie. How do you fund short sales? Should I be looking at a hard money loan?


If you have to finance a short sale, its better to have a financeable property because usually, and in my experience, trying to go the 203K route, takes you down a rabbit hole you rarely recover from. If you have a $150,000 as is property, and a $200,000 as repaired property, you will get a $200,000 203K loan with $50,000 used for repairs. That part is great but, if you are buying the property for less than what is owed, what value do you think the lender is going to use? The lender that has an interest in the short sale is going to use the $200,000 figure to calculate their minimum net proceeds. But? Can they? They can't really in my opinion because $50,000 of that $200,000 is going to be eaten up by repairs so the actual loan amount available to pay the existing loan is $150,000. But again, the sales price is $200,000. I don't see a lender saying, "Ok, we are only going to get $150,000 because the buyer is going to use $50,000 of that $200,000 to improve their new home so let's proceed". I don't see that happening. I see the lender saying, "Heck no...we'll just foreclose". You'll say, "But if you foreclose, you can only sell it for $150,00 as is also, and to get $200,000 you have to put $50,000 and the net will still be $150,000 to you so, accept my offer".

I might be rambling at this point but to sum it up, 203K's don't fit in financial models well in a short sale. At least not in this market. Just a few years ago, I think this scenario would be more doable because values kept going down but in a rising value market, the longer the bank holds the REO, the more its worth so the motivation to accept a 203K is less, in my opinion.

Originally posted by @Steve Smith :

@Eric Michaels yeah the seller has accepted and we are still waiting on the bank. I’m not sure what they will come back with and expecting they will want more.

Good Luck. In a short sale the seller has no say in the price so what he accepts is irrelevant.


Hey Steve,

Just had a few questions: When you first walked through the property was the water damage already there?  If not you can always go to the bank and tell them they need to do a new inspection of the property as the condition of it has changed.  Sometimes they offer a discount with verified photos if the condition of the property changed from you first submitted your offer.  

I am a certified 203K General Contractor:  The repair list that the 203K inspector will create is usually whatever it takes to make the property habitable and safe.  

Funding your project you have several options:

1) 203K Loan - This is your cheapest option.  However there will be a draw process that does sometimes tend to slow down the project with draw inspections, paperwork, etc.  If you need any Mortgage company referrals let me know.  Like I said we do 203K Renovations as the General Contractor often.  However, if your renovation loan is less than $35,000 it is less paperwork but they only give out 2 draws (50% to start the job/50% when the job is complete).  The GC does charge a bit higher because they are floating a larger portion than normal jobs.   

2) Cash/Hard Money/HELOC/Private Money: If you can pay for the property and then refinance out as you will be living there that might be the least amount of red tape. Hard Money cost will not be cheap at all so if I was to choose the lesser of two evils I would go the 203K route.

Hopefully this helps.  Feel free to reach out if you want to discuss further.

Thank you Neil.  Yes the damage was there, and the mold will only get worse as it sits.  Your information was extremely helpful, thank you for your time.  If we get further along in the process I will reach out again.