Boston MA Home Equity Line, Commercial

8 Replies

Hi Commercial RE Investors,

I have a question regarding home equity line of credit or HELOC.

Here is the scenario:

I went to a local bank asking for a line of credit on my 6-Unit. The lender would offer me an 80% LTV of the appraisal value. I really like the 80% part, so I proceed with them. I want the appraisal to be by income instead of comp, so he said that the fee will be a bit higher than comp ,$1200. FYI: typical fee is $750-$1000. Long story short, the credit line took about two months to close. The closing cost came out to be about $3k. The line is revolving for 1-year and be reviewed annually.

My question is:

1) Does it usually take this long to close on a credit line? For God sake, it usually only takes me about 1 month ish to close on a house, in which is a lot faster.

2) Does the closing fee usually costs this much, $3k?

3) Is the 1-year revolving and being reviewed annually are typical term is typical?

4) Does the 80% LTV easy to find? I thought this 80% and the income evaluation method are the only good things that came out of my whole process. Most lenders would only do 75% or less.

5) Why does a lot of lenders still appraise by comp when it is a 6-unit? I could never understand this. I thought that anything more than 4-unit is automatically be appraised by income.

Thanks ahead for sharing your input.


@Chan K. So how much actual cash did you get on this 80% cashout?

@Chan K.  

Because it's a commercial loan it's much different than a conventional HELOC or mortgage loan.

You essentially are getting a commercial LOC secured by your property. And yes costs of 3k are rather normal on a 6 unit (the bad thing is they would be similar on a 10-20 unit property so you get hit the worst at the 5-10 unit range).

Timeframes can range greatly, depending on the bank, your relationship, backlog of their appraiser network etc etc. The commercial LOC essentially takes the same amount of time as a refinance CRE loan, and comes with similar costs.

Most smaller multi-families are evaluated by income & sales approach.  You will generally get an opinion of value from the sales approach and then by income approach.  They might blend the two for the final number.  The bank might pull more from one or the other.  

How big is the bank?  What's your interest rate?  Do you have a plan for the available cash?  If you are going to deploy the capital somewhat quickly <1 year it might have been better to do a term loan.  What did the bank charge in the way of fees beyond appraisal?  

@Mike Hurney  the closing fee is 4-5% of the cash out.

@Chris Winterhalter  Thanks for the confirmation. Your explanation seems appropriate as the building is financed with a commercial loan as well. 

- The institution is larger than credit union, but a lot smaller than Bank of America or TD Bank. They are local with branch in my town and a few adjacent towns. 

- The interest rate is 5.75% (prime rate + their)

- I already have another commercial building line up for this capital as we speak. The new purchase is already under contract. We are going through due diligent and home inspection phase now.

- The appraisal came up to around $1200 and the fee beyond after appraisal is another additional $2300.

[Chris] If you are going to deploy the capital somewhat quickly <1 year it might have been better to do a term loan.

[Chan] Would you be able to elaborate what is a "term loan" you refer to?

Some small banks have a committee that must approve, and sometimes that committee meets infrequently, and when they need something additional to help support underwriting ... well, that can take up some time. 

@Chan K.  

So If I understand your comment about the amount of cash back correctly then you only received $60,000-$75,000 in cash out?  Like I mentioned you are going to have a certain amount of base/fix cost associated with financing a 5+ multi-family.  I'm guessing the 3k you mentioned includes the appraisal, title/lawyer fees, & bank fees.  My question specifically was did the bank charge you any fees outside of title/lawyer, appraisal, etc. Essentially anything that wasn't a pass through from the bank i.e. profit center like loan fee, underwriting fee etc etc. 

A term loan essentially refers to a commercial loan with regular (scheduled) principal & interest payments over a certain period of time. An interest only (I/O) LOC wouldn't be a term loan. A ten year mortgage would be a term loan. A regular LOC wouldn't be a term loan either. A term loan would have given you the flexibility of fixing the interest rate for a longer period of time (hopefully an interest rate closer to 4%) & potentially having lower interest payments depending on the amortization.

However a LOC can serve a purpose if your goal is to funnel the funds in and out for flip deals, rehab funds etc. The obvious benefit would be not paying interest when your capital isn't working for you.

@Chris Winterhalter Based on your description, term loan was what I was looking for. When I called, they did not offer/mention about it. I guess since I am premature, I don't know what to ask for. The LOC was mentioned and acceptable for me at the time even it is not the best option after this forum discussion. I believe in your recommendation, I envision something like a second mortgage form as a term loan.

I am not thrill about paying the 5.75 interest only for the LOC, but the equation/number still works, and I am able to continue to grow my portfolio. If I understand this right, it is still better than collateral the building. The lender actually recommends that instead of doing another LOC on the new purchase (currently is doing due diligent), the next property I am purchasing, I should collateral my new purchase. This could get very hairy in a tough time. FYI: he wants me to sit out 6 months before buying another one, leveraging off the new purchase.

For buy/hold investing, it is very difficult to seek out and accumulate down payment capital. Most private investors don't want to tight up their money more than 6-12 months. Also, the HML would never work on buy/hold due to their crazy interest rate. Maybe, I will become the HML myself once I have my multi-million, LOL.

@Chan K.  

Okay just so I fully understand your LOC is in second position on your 6 unit? So you have an existing commercial loan in place on the building? Does the same bank hold the 1st & the LOC? You could have refinanced the entire transaction going up to the 80% LTV. That's neither here nor there. Continue to grow your portfolio and use the LOC wisely. It sounds like you have a solid plan in place.

And yes HML do not serve a purpose for multi-family properties (outside of very small units for short periods of time). Build your private lender relationships which can be structured with more flexibility.

Good Luck! 

Hi Chan,

    Have you found a bank that has reasonable rate in the area with less than 30% down? I am looking for a commercial lender and so far I have talked to 2 and both require 30% down. Thank you.

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