13 May 2008
Is a hard money loan the only way to go?
I’m starting to wonder what the best way is to acquire capital for purchasing/rehabbing investment properties is. Recently, we put a four-plex under contract that we are planning on fixing up a bit and then having a management company take care of getting it leased. Then it was time to get the financing in order.
I have often seen hard-money recommended to investors because it comes with the least restrictions. Well, after looking into a few, I noticed a trend of loan terms in the area of 5+ points and 13+% interest rates. Since I just bought my house with zero points and a rate around 6%, this seemed a little excessive. We were referred to a local bank that is one of the few in the area that have a structured rehab loan. All in all, it seemed like a good deal. They would loan us 70% of the after-repair LTV (Loan To Value), so that we could roll the repairs into the loan. This would be prime + 1% (currently 6.25) interest only for one year and then we could refinance into a traditional mortgage.
We went forward with the application and found out that my DTI (Debt To Income) ratio was too high for them and my business partner’s credit score was too low for them. So, against my better judgment, we added my wife to the application. This got us past the first step. One issue that we knew we would run into is that the comps in the area were really bad. All of the houses in that subdivision had been foreclosures over the last year or two. They have almost all been purchased at rock-bottom prices and rehabbed. Several are now on the market for more than double the price that we were purchasing at, but they have not sold yet, so there are no useful comparable sales.
We then went and got our contractor estimate for the repair of the property and turned this in to the lender. Next thing we hear is that the lender spoke to an appraiser and their response: “We are going to pass on the property. You would be required to put more dollars into the property than you wish or reflect.” What? So, off I go to write a large four paragraph response to the lender requesting clarification on the reason for the rejection. I pointed out that the contractor was very experienced in that neighborhood and that the quote was a hard quote, not just a rough estimate. I also pionted out although the comps did not yet support a high value, some surrounding rehabbed properties were listed for over double our purchase price. This is the exact response I got from the lender.
“We are going to pass on the property.”
I guess they never want me to call them back when we need our next loan. They weren’t even willing to tell me why they were going to pass.
So, needless to say, we scrambled to find a lender who would be willing to work with us. Right now, we are dealing with Jenny Zillner at Pulaski Bank who has been more than helpful and understanding of our situation. Although we’re still not going to be able to get the loan we want because of the lack of comparable sales, she did go over every possible scenario with us and we have worked out a traditional mortgage. If we didn’t already have some capital to put into the property, it just wouldn’t have worked. Once we have a few properties under our belt, we should have enough cash in the bank to handle some cash purchases, but that is a couple of years down the road.
I know that loans are a lot more difficult to get these days, but I still thought that we’d have more options. For me, a few questions come out of this.
- If you were a lender, would you burn your bridges as shown above, just because you didn’t like a property that was brought to you?
- What are the best options for generating capital? Hard Money, Friends and Family?
- Does potential income from the property have no bearing on the loan?
This property will easily cash flow a huge return on our investment.
Let me know what you think in the comments below.
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As you have found the investment world of credit is changing rapidly. What is promised today may not be available tomorrow.