spending on an REO property even before closing

30 Replies

My mortgage broker has convinced my husband to spend on some improvements in the house that we have a contract on,, so that it would appraise correctly and help him get approved for the loan. I am not so convinced this is a good idea. Is this a normal or at-least not-unheard of thing?

Account Closed bad idea. Very bad idea. Not only is it a risk, but if you read the contract I believe you will find it is a violation of the terms. 

NO NO NO 

Get rid of this guy. (not the Husband) lol

I do that...fixing. .. All the time. In fact I just did some drywall work and patched a roof because it was leaking.  The house is Reo and owned by a bank. I have done that on approximately 6 houses. Otherwise the underwriters will deny the loan and I'd miss out on the deals.  

Think about it. .. spend $200 and get a good deal out of it.

It just depends on the cost.  If it's a couple 100 then I would do it.  I have placed a tarp over an open roof on a property (to minimize any further damage) and have also done some yard work before closing.  I also know my lender and would not do anything if I was not 100% sure that I was going to close on home.  I would not advise on anything serious though, and do keep in mind it is a violation of the contract.

We have rehabbed 2 homes before we closed on them. It's not necessarily a problem providing you are careful. Have a good attorney involved.

What kind of repairs? Are the repairs for the appraisal or for an inspection?  Doing work to get the property to "appraise" is very different that doing a few repairs so it will pass an inspection.  The repairs may or may not affect the appraisal value.  If it's something like a water heater brace or smoke detector or appliance or easily repairing something?  That's done all the time at the buyer's expense in order to get the lender to sign off and underwrite the loan.

If the broker thinks the property won't appraise for purchase price, that's a different problem and may require a lot more than just a few repairs.

If it's items that Fannie Mae or Freddie mac or the FHA require like double straps on a water heater and running water and co 2 detectors and something covering the floors ( carpet or tile ) then it's a must if you want buyers who have to get regular conventional financing.

If it's a cash buyer it doesn't matter but you would sell it for less because the items aren't completed.

So spending a couple of hundred dollars will help you sell your investment to a larger pool of buyers.

Maybe adding A/C or redoing the the kitchen and bathroom might cost you 5 -15K but if you can sell the house for 30-45k more after repairs it's a great investment.  I guess it just depends on how much you want to put into it :)

It was adding a stove , fixing a few leaks in the plumbing and repairing the boiler as it was an REO property and not too well kept

Originally posted by @Shaun Weekes :

If it's items that Fannie Mae or Freddie mac or the FHA require like double straps on a water heater and running water and co 2 detectors and something covering the floors ( carpet or tile ) then it's a must if you want buyers who have to get regular conventional financing.

If it's a cash buyer it doesn't matter but you would sell it for less because the items aren't completed.

So spending a couple of hundred dollars will help you sell your investment to a larger pool of buyers.

Maybe adding A/C or redoing the the kitchen and bathroom might cost you 5 -15K but if you can sell the house for 30-45k more after repairs it's a great investment.  I guess it just depends on how much you want to put into it :)

The OP is the buyer, not the seller.  The mortgage broker is telling the buyers to make repairs at their own expense to the seller's house so it will appraise in order to get the loan.  Hopefully it's not about the appraisal but about a few inspection items the lender needs. 

if its a HUD home it's a felony to make the repairs before closing. On a regular Reo it is still a bad idea to make repairs before closing unless you have it in writing that the seller approves it. You don't own the house and you can't repair it. Some investors may do it, but that doesn't mean you Gould.

I'm not an Investing expert but I do know that adding those items ( especially the plumbing and boiler ) will make a residential real estate appraiser not ask to do a 442 or 1004D if a buyer is looking to buy with a conventional loan.

A 1004 D or 442 means that the appraiser is saying something isn't up to par per fannie, fha or freddie guides and he/she will return ( at a cost ) when the items are done.  If the items aren't complete then the lender might not accept the appraisal. 

  I thought this was the seller not the buyer speaking.  My apologies as I'm backwards on this one.  Thanks K. Marie

Since this is the the buyer this is a huge risk.  What if you don't get the home?  I'm pretty sure the seller isn't going to give you your money back if that happens.  Plumbing and a boiler aren't little things...

This doesn't sound right and if you can get your EMD ( Ernest Money Deposit ) back I would and find a new realtor as well.

That's just me though.

I have done it. I don't recommend it though and I doubt I would do it again. I was approved for a 30 year investment loan but the house did not have any carpet in it. I did not have any plans on going the hard money route so my only option was to cover the concrete floors or back out of the deal and lose my earnest money, plus it became sort of a challenge to get the deal done so I had to do it. Luckily I had a crew of carpet guys that could get their hands on some old used carpet. It was disgusting carpet due to animal waste...I mean man it was bad. Nevertheless, they roughly installed the carpet and it met the requirement of floor coverings so I got the house. Stupid, stupid lending guidelines required covered floors in order to be considered livable...an animal wouldn't want to live on that carpet but it got the loan approved. That was my second investment property and it taught me about the livable condition rules for conventional loans.

Originally posted by @Wade G. :

I have done it. I don't recommend it though and I doubt I would do it again. I was approved for a 30 year investment loan but the house did not have any carpet in it. I did not have any plans on going the hard money route so my only option was to cover the concrete floors or back out of the deal and lose my earnest money, plus it became sort of a challenge to get the deal done so I had to do it. Luckily I had a crew of carpet guys that could get their hands on some old used carpet. It was disgusting carpet due to animal waste...I mean man it was bad. Nevertheless, they roughly installed the carpet and it met the requirement of floor coverings so I got the house. Stupid, stupid lending guidelines required covered floors in order to be considered livable...an animal wouldn't want to live on that carpet but it got the loan approved. That was my second investment property and it taught me about the livable condition rules for conventional loans.

Putting in trashed, pet damaged carpeting to get a loan approval? That has to be the best story ever about lending inspection guidelines.   

I wouldn't suggest making capital improvements prior to purchase, the only caveat being, minimal cost repairs. This property might be primed for the FHA 203k. You can obtain a loan with the highest LTV, best possible market rates and cash for improvements. This loan is suited for "fixer-uppers". The only drawback is FHA required mortgage insurance.

The only potential drawback, would be losing out on a cash buyer if the banks looking to move the REO fast. The FHA203k has a reputation for being cumbersome. Good Luck!

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kmenu

My wife and I moved into a foreclosure and got something like a contractor-lien? The experts on here can obviously give you better advice. I'm just saying there are options. We were given 6 months and some upfront costs for repairs and that transitioned into our conventional. It was tedious and laborsome to fix it while going to our day to day 8-5s but it is possible. Good luck in whichever route you take!!!

Originally posted by Account Closed:

It was adding a stove , fixing a few leaks in the plumbing and repairing the boiler as it was an REO property and not too well kept

So it doesn't sound like an appraisal value issue, but rather your lender's inspection. Are planning to live in the property and getting an FHA loan? Adding the stove is no big deal. I've had buyers do that to get their loan approved. I'm not sure I'd deal with the plumbing or boiler unless the repairs are super easy and cheap and your husband can do them himself or with the help of a friend. I doubt I would hire an HVAC guy for a property I didn't yet own. There really is liability there. You don't have permission to bring contractors onto the lender's property.

It's not true that REO banks won't do repairs to get properties sold. You can always ask. Are there lots of cash buyers with back up offers to buy this property? If not, ask the lender to do the repairs. Your agent should be able to advise here.

there are a few ways to do it... 

1. if you get a construction loan, you can close on a house that needs repairs. higher cost and bigger PIA (pain in ***) factor with legalities
2. if you pay cash, obviously no need for any of that
3. some banks will allow you to escrow the repair cost which are around 120% of the highest contractor quote. then you get it back.

I could not close on one house because 3 bundles of shingles were blown off the roof of the garage. so they said "fix the roof or you can't close on the loan". the bank said "No, we are not fixing it". so i bought 3 bundles and spent 2 hrs. called the appraiser back and closed on the house.

i will do it whenever i need to in order to close

Maybe you can ask the seller to do the necessary repairs and in return you increase the purchase price by the amount you would have spent on them yourself.

Consider the fact that once you buy it you will be paying interest on the money starting day one. The sooner you have it ready to rent or sell the quicker your ROI begins. Everything in RE is a matter of balancing risk and reward. I've done this before and not regretted my rent checks coming sooner!

Like everything else, you have to do a cost benefit analysis for yourself.  The main benefit is you can be up and running, ready to rent sooner.  Since vacancy is your biggest enemy in the rental business that can be a big benefit.  On the other side, there are lots of times things don't go according to plan, especially when banks are involved.

Do your thinking about it on paper to help clarify your options and weigh things out.

Thank you for your replies -Had no choice -spent around 3K to fix things up to get the CO that my lender insisted. Have closed on the property and dont regret the decision ! 

REO banks will not fix anything it is sold AS-IS don't believe these gurus that tell you the REO banks will fix things they are out of touch with real estate buying.


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