Most of our clients are real estate investors who are buying distressed properties and using rehab loans to get them looking good again. With so many foreclosures and short sales out there in need of repairs, buyers of these properties often ask us, "How does a rehab loan work?"
Because a property is always more valuable after it's been fixed up, a hard money rehab loan is usually given based on the value of a property after fix up. Most rehab lenders will lend on the After Repaired Value and will give you a loan for 60% to 65% of the After Repaired Value. How does this differ from a regular loan? Most loans are given based on a percentage of the purchase price and not on a percentage of the After Repaired Value.Â
Let's look at an example of how a rehab loan works:
A foreclosed property needs work and is under contract to buy for $138,000. The property needs new appliances, flooring, paint, etc. It will cost approximately $15,000 to repair the property and get it ready to resell. Once the needed repairs and upgrades to the property are completed, the property should sell for $190,000. The buyer could get a hard money rehab loan to purchase the property. If the lender gives the buyer 65% of the After Repaired Value of $190,000 he could get a loan for $123,500 towards the purchase price of $138,000. To read the rest of this example, click here: http://privatemoneyutah.com/how-does-a-rehab-loan-work/