Working With a Distressed Property?

Question

I've been thinking about how early financing should enter the conversation when an investor is looking at a distressed property.

A property might look like a great opportunity based on the purchase price, but there are several other numbers that can affect whether financing makes sense: the property's current value, estimated ARV, rehabilitation budget, available reserves, and the investor's exit strategy.

It seems like there can be an advantage to looking at these numbers before an investor gets too far into a deal.

I'm also interested in how other professionals approach this. For the investors, wholesalers, agents, attorneys, and title professionals here who regularly work with distressed properties:

At what point in the transaction do you believe an investor should start discussing financing?

Before making the offer, after the property is under contract, or somewhere in between?

I'd be interested in hearing what has worked best in your experience.

Diana Khan · Answer

@Brian Taylor, from working with investors on distressed properties, I like to bring the financing conversation in before the offer whenever possible. I’ve seen buyers find a property at a great price, get excited about the rehab and ARV, and then learn that the financing does not fit the condition of the property or the time they actually need to complete the work. By then, they may already be under contract and working against a deadline.

I also think the lender and legal side should move together. With distressed property, I want to know early if there are title problems, liens, estate issues, code violations, permit problems, or anything else that could delay closing or affect the lender. I would also want the purchase contract to give the buyer enough time for financing and due diligence, instead of trying to solve those problems after the deposit is already at risk. In my experience, getting those conversations started early gives the investor more options and usually makes the closing much cleaner.

I like that you are looking at financing as part of the whole transaction instead of something that happens after the offer is accepted. I’d be glad to stay connected and keep up with what you are seeing on the lending side.