203k Loan Financing

[Thomas D Price IV]

Hi all. I plan on mostly focusing on really distressed properties. From what I've heard, banks will laugh you out the door if you ask for a loan for these types of properties? How is everyone else getting financing for properties you can increase the value on via forced appreciation? Is the 203k loan the only way to do it? 

[Stuart Udis]

Most community banks, regional banks and credit unions offer construction financing. They generally rely on an "as is" and "after complete" appraisal and release drawable funds as the construction progresses similar to the process of 203K loans. One of the overlooked problems with 203K loans is contractor participation issues. Since you are required to select from a short list of qualified participants the costs are generally higher to complete the same renovation. While you may rely on less down payment capital the project costs are likely going to be higher. Certainly, something to weigh and evaluate. 

Another consideration is the lending relationship. Real estate funding through community banks in particular is all about relationship lending and building those relationships is incredibly important. Most of my current banking relationships originated 10+ years ago when I was originating $100K loans through community banks. I followed those bankers as they moved from bank to bank and so many doors are opened through maintaining those relationships. I still bank with many of those original community banks and they become increasingly flexible with terms as they gain comfort with you as a client. They are often far less rigid in their underwriting.