project manager Mike Eveslage (tossing box), contractor Jay Inman (lifting bag) and recycler Sandy Kiddie.
A property in central Colorado Springs has become a renovation project for Karen McClaflin (right), owner of Home Source Partners. The company works with distressed houses, carrying the financing for new buyers if necessary until they can qualify for a permanent mortgage. Helping with renovation: project manager Mike Eveslage (tossing box), contractor Jay Inman (lifting bag) and recycler Sandy Kiddie.

Karen McClaflin flips houses, and she’s good at it.

She sees damaged and neglected properties as diamonds in the rough. She buys them, guts them and makes them livable again.

She’s adding a new twist to her home-flipping business, Home Source Partners, Inc. She will carry the financing on a house for a buyer for up to two years. Buyers can get into one of her houses, typically worth about $175,000, with the equivalent of a security deposit and a first-month’s rent. After two years, the buyers will have a mortgage history that should qualify them for permanent financing. And then Home Source Partners is out of the picture, McClaflin said.

“We figured the best way for an investor, like me, to buy a house is to know you can sell it,” she said.

So far the formula is working.

Since January, when McClaflin launched Home Source Partners, she has sold six houses. Three are under contract to be sold, and she has four under renovation.

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“We are turning up the flame to increase that — to double that,” she said. “I have a list of 20 people right now waiting to get into a house. I need to find more houses.”

McClaflin, who has been in the real estate business since 1979, owned a We Buy Ugly Houses franchise from 2006 to 2010 but broke away this year because she wanted to add the financing program.

In Colorado Springs there are roughly 4,000 homes for sale and sales were down in 2010 from 2009, according to the Pikes Peak Association of Realtors annual sales summary.

In this market, cash-only investors such as McClaflin can buy up properties — especially short sales, foreclosures and distressed properties — for a steal. The problem: Once she’s spent thousands to renovate the property, there are few qualified buyers, she said.

Banks have adopted tighter lending standards since the housing bubble burst, McClaflin said. And they’re requiring buyers to pay larger down payments.

“They might have strong credit and six years on the job, which shows stability, but they don’t have $25,000 to put down,” McClaflin said. “The lenders aren’t willing to have a repeat performance of what just happened by offering 100 percent financing anymore.”

McClaflin pays cash for the houses she buys and can spend as much as $90,000 to renovate each one. Some are sold to investors who want to rent the property; others find buyers who qualify for a traditional mortgage loan.

For those who cannot qualify for a loan, McClaflin is ready to step in with private financing using a two-year installment land contract, which allows the buyer to move into the house and make payments. The contract gives the buyer equitable title to the property. Later, when the buyer gets a traditional home loan and the financing moves from Home Source Partners to a bank, the buyer will get the warranty deed to the property.

“It’s an interim step that helps them instead of waiting two years because they can’t qualify to buy a house,” McClaflin said. “There are so many houses out there right now to buy and they can buy them for a whole lot cheaper than they will be able to in two years.”

This year, Home Source Partners also aims to give away one house. McClaflin has enlisted a cadre of investors to kick in money to buy a distressed property; she says she’ll do all the renovation and then ask people to write in with their stories. A review panel will choose who gets the house, she said.

“They would own it outright — we would give them the keys, sign a warranty deed and they have the title to the house,” she said.

Even before she owned her franchise, McClaflin operated her own real estate company and has specialized in investment properties, working with investors to find distressed properties.

In recent years, she has purchased many distressed properties from probate, banks, landlords with problem rental properties or homeowners who cannot make major repairs necessary to put a house on the market.

Home Source Partners, which has a full-time staff of eight, employs two cleaning crews, two hauling crews and two general contractors to buy, renovate and sell houses. The crews can have a house ready for sale in about 30 days.

Walking through a three-bedroom house with a knockout view of Pikes Peak that she recently purchased for $46,800, she took note of the work ahead. She will spend about $70,000 to gut it, fix structural issues, put in new wiring, replace nearly everything in the kitchen and bathrooms and replace the floors.

“It has good bones,” she said. “It just needs some attention. It’s a diamond.”