Financing Question

[imirza]

My partner and I have found a multi family property we want to rehab. Total cost including acquisition and rehab will be around $180k. Once we are done this property will appraise for $250k or more. We are planning on doing the acquisition and rehab using our money. Once we are done with the rehab ( 4 to 6 months) and have tenants in place, we want to refi with a bank and pull out our initial investment ( $180k).

The challenge is that, the banks that we have spoken to will not allow this. They are willing to refi us up to 70% of acqusition and rehab cost. They will not allow us to use a new appraisal. They want the property to be seasoned for 2 years. I know in the past seasoning was only 6 months. Anyone know any banks that will refi off appraised value in 6 months ? Any suggestions how we can get around this.

Thanks

 

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[SteveO]

See if you can locate a bridge type loan. You will pay more in interest but these loans are designed for this.

 

[Analyzer]

banks are getting much more cautious since the crisis began. for example, where I live 100% finacing totally disappeared and it was really common just 6 months ago

 

[imirza]

Thanks Steve. I'll look into bridge loans.

 

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[rxcknrxll]

requiring seasoned title is an almost unanimous condition from my experience. refinancing is pushed out a year or two, and 30% equity is also normal requirement for nonowner occupied. i'm just confirming that what you've been told sounds legit. i'm not doing any rehabbing for now. i don't know your local market, but careful with what predictions you make regarding the value after rehab.

 

[GLC65]

I have found bridge loans or construction loans are extremely difficult to come by these days. I normally avoid construction loans due to the massive amount of paperwork the title company requires for you to collect a draw. I normally purchase the property with no prepayment penalty and use my home equity line of credit. I then go in for a cash out refinance. I would ask the seller to seller finance the acquisition with a nominal amount down and buy it under articles of agreement, invest in the construction whether it is via cash or a line of credit, and go and refinance the property and pay off the seller`s owner finance note and pay off your line of credit. Sellers will really work with you during these tough economic times.

 

[RealOG]

Me and some partners are contracting on 56 unit deal (multiple buildings). Part of that deal is 16 units which are vacant. We are writing a seperate contract on that for $100k and seller is giving us financing for it. The other buildings are being done by a bank as a blanket mortgage with partial release clause. Goal is to purchase this small portfolio of buildings, improve their performance, and sell them off individually over the next five years.

imirza - since the loan amount is small, you might want to try local banks or lenders in the area. We have had much more success with them on smaller loan amounts. If it is difficult to lend on, you should expound on this during the negotiation process and factor it in the terms of the deal you agree to with the seller.

 

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[rxcknrxll]

I have found bridge loans or construction loans are extremely difficult to come by these days. I normally avoid construction loans due to the massive amount of paperwork the title company requires for you to collect a draw. I normally purchase the property with no prepayment penalty and use my home equity line of credit. I then go in for a cash out refinance. I would ask the seller to seller finance the acquisition with a nominal amount down and buy it under articles of agreement, invest in the construction whether it is via cash or a line of credit, and go and refinance the property and pay off the seller`s owner finance note and pay off your line of credit. Sellers will really work with you during these tough economic times.

It's true that (reasonable) sellers will work with you on terms. It's not a secret the economy's busted right now. They know they're trying to sell property in a very difficult climate. If you're not creative though, don't expect the seller to say "hey, by the way, i'd be willing to..." fill in the blank. come up with terms that work for you and put em on the table.

 

[MattThomas]

I'm slightly confused...are you paying the 180k in cash? Because if you are taking on a mortgage for that amount, and then it appreciates to 250k, you wouldn't have the equity to take out a second mortgage (or home eq) for that amount. Even if the property appreciated to 360k, no bank would allow a non-owner-occupied property to hold a 100% combined loan to value.

Maybe I missed something with your question, and if I do, I apologize.

Bride loans sound like a good idea...if you are looking to buy another property with the 180k that you want to pull back out, maybe you can do a blanket loan?

 

[imirza]

RealOG - I can get financing. But only up to 70% of the amount I put in. In other words I pay $180k cash for purchase and rehab, the property is worth 250k when done, but the bank will only lend 70% of the 180k . They won't go off appraised value until we have had the property for atleast 2 yrs. I spoke to small local banks. One of the banks we spoke to, my partner has had a business relationship with for many years. They are still overly conservative.


GLC65 - The properties are bank owned. Therefore seller financing is out of the question. But no doubt seller financing is big in today's market.

Matt - Purchase and rehab costs are a total of $180k. My partner and I will use our own funds. No mortgage. We want to refi and cash out are 180k once we are done and the property is appraised at $250k. The banks will not allow it. They will allow us to refi based on a $180k purchase and rehab cost.

As far as the property goes, the bank rejected our offer. I'll wait till the property is on the market 180 days and make another offer. Sooner or later they will accept the offer.

 

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[GLC65]

RealOG - I can get financing. But only up to 70% of the amount I put in. In other words I pay $180k cash for purchase and rehab, the property is worth 250k when done, but the bank will only lend 70% of the 180k . They won't go off appraised value until we have had the property for atleast 2 yrs. I spoke to small local banks. One of the banks we spoke to, my partner has had a business relationship with for many years. They are still overly conservative.


GLC65 - The properties are bank owned. Therefore seller financing is out of the question. But no doubt seller financing is big in today's market.

Matt - Purchase and rehab costs are a total of $180k. My partner and I will use our own funds. No mortgage. We want to refi and cash out are 180k once we are done and the property is appraised at $250k. The banks will not allow it. They will allow us to refi based on a $180k purchase and rehab cost.

As far as the property goes, the bank rejected our offer. I'll wait till the property is on the market 180 days and make another offer. Sooner or later they will accept the offer.

I don`t know whether it is legal in your area but why not put the property under one partner`s name. Have a side agreement to protect the other`s interest. Rehab the property, get it stabilized with new paying tenants. The second partner purchases the property and closes the deal. After closing, quit claim the purchaser out and add the new partnership to the deed. By the time the bank finds out, tell them the truth and if they tell you to take a hike, you should have enough seasoning and stability to get financing elsewhere.

 

[imirza]

I don`t know whether it is legal in your area but why not put the property under one partner`s name. Have a side agreement to protect the other`s interest. Rehab the property, get it stabilized with new paying tenants. The second partner purchases the property and closes the deal. After closing, quit claim the purchaser out and add the new partnership to the deed. By the time the bank finds out, tell them the truth and if they tell you to take a hike, you should have enough seasoning and stability to get financing elsewhere.

GLC65 - I like the way you think. My partner and I had also thought about that. The one issue could be banks are creating a big stink if you change the title of the property after you get the loan. In some cases they have clauses in the financing contract stating that the loan is considered due and payable immediately if the property changes title. Though in this environment I think banks will think twice about foreclosing especially if you are making payments on time.

The other option we have is to create a separate entity controlled by us which lends us the money and places a lien on the property. Once we are done with rehab, we could request a refi to pay this lien off. I think this may be a more palatable solution.

 

[GLC65]

GLC65 - I like the way you think. My partner and I had also thought about that. The one issue could be banks are creating a big stink if you change the title of the property after you get the loan. In some cases they have clauses in the financing contract stating that the loan is considered due and payable immediately if the property changes title. Though in this environment I think banks will think twice about foreclosing especially if you are making payments on time.

The other option we have is to create a separate entity controlled by us which lends us the money and places a lien on the property. Once we are done with rehab, we could request a refi to pay this lien off. I think this may be a more palatable solution.

After you are done with the rehab and stabilization of your property, your partner or yourself can purchase it at appraised value. Appraised value is very arbitrary. As long as there are comps and the numbers work, you should get your targeted appraised value. You might pay more for closing costs and the recorded price might jeapardize your real estate taxes, but that is the game to play for the dumb rules these bankers are coming up with like no refinances until the property has been seasoned for two years. I think the best way for you to explore your options is to get a creative mortgage broker and have him give you and your partner a game plan. Just stay in the gray area and do not be tempted to commit bank fraud. I know every case is different and there are so many loop holes. It is like a chess game. As for the bank finding out and calling the loan, I do not see that happening. Banks want you to get partners if you are having difficulty managing the property. Almost every loan has a clause of no second liens on top of the first but many second mortgage lenders disregard that and will give you a second mortgage and record it on top of the first. If there is a default, the second position lender need to pay off the first. As long as there is equity, you should not have a problem. Some bankers will tell you in an indirect way to be creative but not to tell them about it. Good luck to you. A lot of times, it is not the real estate game but the finance game.

 

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[msa1]

You didnt mention where you shopped this mortgage. Have you tried local banks or credit unions? I spent last week meeting local bankers looking for commercial funding. Most seemed receptive and would go 75%LTV. Give them a try.

I know what you mean about seasoning. I never understood if you could substantiate the rapid rise in value (through before and after pics and proof of receipts for material) why they would still require seasoning.

I'm a licensed builder and pull all permits on my houses. I've bought basket cases and turned them around and it doesnt seem to matter.