Summary: Real-life example

Some owners fail to maintain their properties for all the obvious reasons.

Typically, a buyer anticipates a rise in value by revamping, enhancing operational efficiencies, rebranding, and increasing rents, thereby creating a promising future for the property. These purchases, often referred to as value-added, represent a strategic approach in real estate.

A savvy buyer, armed with a long-proven formula of buying fixers, upgrading, increasing rents, and holding long-term, understands that they are not just purchasing a property but also ensuring their profit on the front end, thereby creating a few increased digits on their financial statement.

Property owners may be subject to state-mandated approvals and municipal ministerial approval processes. They can obtain a private money loan, make improvements, raise rents, and then secure long-term institutional financing. The method of obtaining a private money loan involves approaching a specializing broker, filling out an application, paying for an as-is and as-completed appraisal, and going through a quick approval process, which the property owner should be aware of.

Article:

Over the years, property owners have faced significant challenges in maintaining their properties, resulting in substantial disrepair. This neglect is documented in recorded public records.

Borrower mortgage broker comments:

I was unaware that the municipality had issued a notice of substandard condition against my client's property. This notice, issued by the building department, indicates that the property is in a condition that endangers the life, limb, property, or safety of the occupants or public, as per the State Housing Laws and the Uniform Housing Code.

When discussing this loan, the procuring broker suggested that whatever was wrong has already been fixed and is no longer an issue. Let's pretend that it is often the solution to obtain a better loan quote, as if everything with the borrower and property is perfect.

The prudent mortgage broker/lender, who is knowledgeable about the State Housing Laws and the Uniform Housing Code, responds:

The State Housing Laws and the Uniform Housing Code define substandard housing as any condition which exists to the extent that it endangers the life, limb, property, or safety of the occupants or public. The city building department official found an infraction that one or more property deficiencies exist, which need to be repaired and brought up to current zoning and building standards.

The notice of substandard conditions may require adjustments, modifications, or the partial or complete demolition of the building. As the property owner, the borrower should contact the building and safety representative to obtain copies of any reports, which will enable them to evaluate the extent of required changes or alterations and the total cost of mitigation. The property owner must be willing to comply with the city's requirements before the notice is released. This emphasis on compliance should make you feel responsible and aware of your obligations.

The lender's expertise is crucial in such situations. They may need to hold back a portion of the loan and deposit the proceeds into a licensed construction fund control company. The fund control company's job is to confirm construction progress, maintain an accounting of the funds, write checks, ensure subcontractor payments, and obtain lien releases. This is not just a simple fill-out-and-check-the-box solution. It is a complex issue that underscores the need for a competent lender who understands the problems and the strategy to complete improvements and close a loan transaction successfully.

In both cases above, converting a bootleg building back to conforming standards or upgrading a building in disrepair will require a building permit, a set of plans, possible engineering reports, cost estimates, and a contractor's estimate to determine the total cost. If the borrower wants to obtain a loan for construction purposes, loan proceeds are handled by a licensed loan fund control company.

With all the above exhibits in hand, the lender would order an appraisal to be completed by a certified appraiser. The appraiser should assess the subject property in its as-is condition before the rehabilitation and in its as-completed condition. The new lender would consider both, including the amount of interest carried during the construction and lease-up period. The reserve dollar amount is added to determine the total loan required.

The above example highlights the significant role of private money lenders in complex transactions. Their flexible underwriting, speed, and willingness to undertake such transactions make them invaluable. Private money lenders are often the go-to option for complex transactions due to their ability to adapt to unique situations and make quick decisions, making them key players in the real estate financing landscape.