Buyers Lender Wants All Rehab Documentation

19 Replies

We flip a fair amount of properties every year and from time to time we complete the buy-rehab-sell transaction within 90 days. When that occurs, the lenders appraiser will usually ask for a list of repairs to justify the price increase. We have even had to get a second appraisal when the buyer was doing FHA financing. In our latest deal, we have run into a lender asking for the following documents:

  • List of all contractors and licenses
  • Copies of all permits for work
  • Every receipt of items purchased for the home (about 35)
  • Make and model number of new appliances, hvacs, garage doors

Needless to say I think this deal is going to die unless the buyer finds another lender to work with. Does anyone else get this kind of request??

Hey @Stan Butler it may seem like a lot, but those are all records that you should have fairly easily accessible. The lender is asking for them to insure that the materials bought actually went to the job, that the work was done by pro's, etc. It's not that uncommon. I'm surprised they haven't asked for lien releases, to be sure you paid everybody.

Also, it's a good idea to keep all of that (along with before and after pics) in an organized way to to counter/motivate potential buyers or their realtors who balk at your price.

Its not a question of having all the records, its a question of divulging what things cost and who my contractors are. The lender is loaning money against a property based on what the property is worth today. What was paid for the property in the past, or for the rehab, should be of no concern. The property is worth what its worth, whether I did all the work myself, or paid $40k for renovations. Otherwise, whats the point in comps?? You might as well just say its worth whatever you paid for it...

Would you go to the builder and ask for receipts for a new home purchase?? I dont think so...

I can see the lender wanting this stuff if I was refinancing a prior purchase and looking to use current value.

@Stan Butler

If my son wants to buy a Ford truck I'll finance a Ford truck. If some fellow tells him he built a truck that's just as good as a Ford but he can't tell him why because he has "secrets"...well I would tell the guy to forget about cerebral pursuits like REI investing and start your own political party.

If you want to learn this industry leave that crap behind. If you are interested in learning about real estate deals you might do well to understand what makes this industry tick, learn some of the principles, learn what is normal, see how successful investors interact with lenders.

Do you really think that contractors don't exist unless you deal with them, or that people don't know what pricing structures exist? Get a grip Stan. Do you think that huge nationwide lending firms really care about who you use? Your next door neighbor is a bigger threat.

Just learn the principles. It's about creating a future for yourself. It’s not a cause. Join the people on BP and become as great as so many of them are. You won't have time to worry about secrets. Just where your next check is coming from.

And you may find yourself trusting (or at least having a powerful knowledge of) people who you feared in that previous life. Go for it Stan!

Stan does have a point. He shouldn't have to justify his selling price with the cost of the rehab. That's what comps are for. If he wants $200K for a place he bought for $100K, put $40K into the rehab, and now it's comparable to houses in the area selling for $200K, his selling price is justified. And good for him for making a profit.

Lenders experienced fraud during the boom with repeated sales of the same property at higher prices. They are looking for justification for the significant increase in value that I assume you're trying to get. They don't care about your contractors. They may care about what you spent because they also don't want to finance a house that's had a shoddy, cosmetic rehab.

You say:

What was paid for the property in the past, or for the rehab, should be of no concern.

Whether you think they should be concerned about this doesn't matter. They are very concerned about this.

You might as well just say its worth whatever you paid for it...

What you paid for it is indeed a very good indicator of what its worth. I assume you're trying to sell it for significantly more than that.

You mention permits. That's not unreasonable at all. Cities around here are tightening up on unpermitted work. I funded a rehabber a few years ago who got caught doing unpermitted work and ended up taking a $30K loss on the project. Further, they're public records and a savvy buyer of a rehab would check permits.

Unless you're willing to let the buyer walk why not just provide the documentation.

@Sylvia B. if you want to finance that property and be on the hook, and your'e left holding the basket, when it turns out that the rehab wasn't done correctly (oh, and by the way the county inspector is wanting to know where your permits and approvals are) that's your option.

The only thing that matters in Real Estate transactions is "can you prove it". An appraisal is an opinion. Comps are only as valuable as the factual basis. Those facts in this case: Are the improvements in place (documentation, pictures, appraisal); Materials cost (receipts and serial #'s), these licensed contractors completed their jobs and have been paid (License numbers, and lien releases). The bank then knows there are no clouds on the title or claims about the product.

If the seller of a rehabbed property did all of the work himself, without permits, without an inkling of building standards, and with the sole motivation of making a profit...would you buy that property just because it looked like other properties? Would you really argue that he should be able to represent his property as being the same quality as one that provided certifications, receipts and appraisals that had factual, documented history. Comps don't mean a thing if they are not based on facts. And that is why you have to document your work and justify your price.

Stan may be a very good rehabber, but you still have to play by the rules.

You said "good for him for making a profit". He doesn't make a profit unless he sells the property. As he moves through this world of REI, he'll sell more properties by playing the game well than by objecting to the rules. If he doesn't like the rules, then like I said: see if you can find a way to make a living off of fear and loathing.

The lender should not care about your markup on the rehab, if the comps support the price. But they do care about quality issues. Did you do the job right, and legally. They are asking for reasonable proof of those things. It may be more than some lenders require, but this sounds like a reasonable protection of their potential interest. Accept that, or don't. Do it, or walk away and hope for a different deal.

@Stan Butler - If you've got all of the info, I would just give it to them. But the contractor stuff would cause me problems. Because I generally use handymen instead of licensed contractors.

@Bryan L. I am sure it depends on the state, but anyone doing that kind of work needs a license in the states I have worked in. It doesn't cost much. If you are using unlicensed workers where a license is required, you are assuming serious liability. And if none are required there, then they likely need at least a business license.

@Walt Payne - Most of my rehabs are pretty light on the plumbing and electrical that's required. The kind of stuff that the average home-owner could do with a trip to Lowe's.

@Bryan L. That makes sense. It would probably be good to make sure they have a business license, for CYA purposes at least since that is a requirement pretty much anywhere.

Oh, no permits?

An owner can do a lot without a permit.

Only need permits for areas that require one, you can say you did the work.

Worst case they send the appraiser in for interior pics and comment on quality of work.

If you bought it for 30, 40 days ago and put 10 in it and sold it for 80, even if it appraised, you'll have a problem as they will certainly question the market and the appraisal.

Send in what you have, explain the rest in a letter. They want to make the loan, that's how they make money, so work with them. But they aren't going to accept collateral on just any deal as Jon pointed out. :)

Around here an owner can only pull their own permits for a house they live in. And they have to stay there for a year after the work is complete. Otherwise, a licensed GC has to pull permits.

Paint, flooring, and minor repairs don't need permits. Its only when you get into more extensive work. Electrical, plumbing, roofing, and remodelling all require permits.

@Patrick Tutwiler

I am not sure why you feel the need to lecture me like a 3-year old. This isn't my first rodeo. I have been investing in real estate for 10 years and have flipped about 40 houses during that time frame (10 in the last 2 years). I have never been asked for this before and neither has any other serious investor in my circle, even on buyers using FHA loans. I have been asked for the scope of work many times and that is not an issue. Providing permits is also not an issue...

@John Holdman you said:

"What you paid for it is indeed a very good indicator of what its worth. I assume you're trying to sell it for significantly more than that."

I read and learn a lot from your posts, but I dont agree with this statement. I am trying to sell the house for market value, easily justified by the comps in the neighborhood. Market value is established by a willing buyer and a willing seller. I certainly understand the lender wants to sign off on the market value since their capital is at risk. When the property was purchased by an extremely willing investor from a distressed seller (bank), thats not market value.

Are you going to tell me that the the guy in the news recently who paid $14,000 for the Faberge Egg that is valued north of $30 million can't sell it for that much because he only paid $14k for it??

The actual question posed was, does anyone else rehabbing get these kind of requests when selling??

Yes Stan, I asked for the same thing for over twenty years on rehabbed homes, it's common, usual, customary and it's not new. If it hasn't been asked before, you were lucky. Much has to do with how long the property was held and the market cycle (how long it takes in that area for prices to change significantly). I've rehabbed as well and was asked for the same info, not always but we provided the same stuff. You may see too that after you've done a lot of deals and lenders are more comfortable with your work, they know about what you're doing, some of that tappers off.

Originally posted by @Jon Holdman :
Around here an owner can only pull their own permits for a house they live in. And they have to stay there for a year after the work is complete. Otherwise, a licensed GC has to pull permits.

Paint, flooring, and minor repairs don't need permits. Its only when you get into more extensive work. Electrical, plumbing, roofing, and remodelling all require permits.

Actually, that depends on locality. My town does not require a permit for any work unless you are changing the footprint of the building. Odd, I know, but I check with City Hall in person before every rehab, and that's the answer. Our current job is a complete gut, and the only permit we might have to get is for the new front porch - if they consider that a change to the "footprint".

Now, we will be working closely with the electric department because we are changing from overhead to underground and getting a new meter and service panel. I'm sure they will inspect the new work before connecting the new meter, but they do not require a permit.

Short answer: yes. Had to provide receipts and contractor invoices for my last project to show the amount of money I put in the job. But not to the level of detail that they are seeking from you. Make and model of appliances shouldn't matter, for example. Once provided it, there wasn't an issue and lender agreed not to share info with buyer (reading between the lines, that seems like your real concern - and it was mine as well). They are just looking to paper the file in case there is a buyback claim from the purchaser on the secondary mortgage market.

Originally posted by @Stan Butler :

The actual question posed was, does anyone else rehabbing get these kind of requests when selling??

Yes.

The lender can ask for whatever they want...it's up to you whether you want to provide it or not. You have every right to refuse and the lender has every right not to provide financing. It's really that simple...

That said, I still don't understand why you don't want to provide this information? You say those details shouldn't matter (and I agree), but I'm pretty sure there are dozens of pieces of information that lenders ask for that you'd agree don't really matter. What specific concerns do you have about providing contractor names and receipts?

Btw, this is the best reason to have your own lender that you can refer your buyers to...

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