Loaning On A Property In Run-down Condition

By Dan Harkey Educator & Private Money Finance Consultant 949 533 8315 [email protected] Visit www.danharkey.com

?Real Life Example- #7 of 24

Over many years, the property's owners unfortunately neglected its upkeep, leading to significant disrepair. This wasn't just a matter of aesthetics but a serious financial issue. Local municipal code enforcement officers were compelled to record a “notice of substandard conditions,” a public record. This notice can become a burden for any potential buyer or lender considering a loan when discovered during a title search. Its presence can profoundly impact the property's marketability and loan terms, potentially resulting in substantial financial loss.

The mortgage broker said……

“I was unaware that the city recorded a notice of substandard condition against my client’s property. ?When discussing this loan, the broker suggests that whatever is wrong has already been fixed and is no longer an issue.? “Let’s pretend the problem does not exist” is used to obtain a better loan quote, as though everything with the borrower and property is perfect.

The lender said……

“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 partial or entire building demolition.? The borrower should contact the building and safety representative to pick up copies of any reports to evaluate the extent of the required changes or alterations and the total cost of mitigation.? The property owner must be willing to conform to what the city will accept before they release the notice.? Has the borrower obtained any engineering reports, cost estimates, or building permits to complete the repairs and improvements?? The city must approve a plan.”

A lender will require a holdback of a portion of this loan and deposit the proceeds into a licensed construction fund control company.? The fund control company’s job is to confirm the construction progress, maintain an accounting of the money, ensure the subcontractor’s payments, and obtain lien releases.? There is not just a simple fill-out and check-the-box solution.? It is a complex issue that requires a competent lender who understands the problems and the strategy to complete improvements and close a loan transaction successfully.

This circumstance will require a submission, plans, and a building permit to conform the property with current building codes. The process may also require engineering reports, cost estimates, and contractors' estimates 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.

Once all the necessary documents are in hand, the lender orders an appraisal. This appraisal is completed by a certified appraiser who assesses the subject property in its current 'as-is' condition before the rehabilitation and its 'as-completed value' after the improvements. The new lender considers both values, including the amount of interest carried during the construction and lease-up period. ?The reserve dollar amount is then added to determine the total loan required. This [thorough appraisal process] ensures the lender comprehensively understands the property's value and loan requirements.

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Thank You

Dan Harkey

This condensed article was taken from my longer article, 'Complex Problems in Real Estate Loan Transactions—Real—Life Examples (1 through 25) ', which provides a comprehensive overview of various challenges and considerations in real estate loan transactions. All examples are on my website, www.danharkey.com, under the Private & Hard Money Lending section.

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