What’s wrong with my deal? (Hard money lending rejection)

Keith Richardson

Investor · VT · Member since 2020 · 17 posts · 8 votes

Good day, BP,

I’m trying to understand why hard money lenders keep turning me down on my rehab project.

The deal:

Paid 60k cash for house needing total rehab

Anticipating needing a loan of 150-175k with an ARV of about 325k

The only thing I can think of is that I don’t have any experience with a project of this size.

With interest rates on these loans being 11-12% and my request amount you would think it’s a score on their end.

What do you think?

Gratefully,

Keith

0 Reply

12 views

Most Popular Reply

Robin SimonBusiness Member

Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes

Quote from @Keith Richardson:

Good day, BP,

I’m trying to understand why hard money lenders keep turning me down on my rehab project.

The deal:

Paid 60k cash for house needing total rehab

Anticipating needing a loan of 150-175k with an ARV of about 325k

The only thing I can think of is that I don’t have any experience with a project of this size.

With interest rates on these loans being 11-12% and my request amount you would think it’s a score on their end.

What do you think?

Gratefully,

Keith

I think its also a harder qualification to get a Hard Money loan for rehab only after you've bought all-cash - changes the deal economics and structure and risk profile on the lender side. Ironically, might have had an easier time if you were requesting a larger hard money loan for both the purchase and rehab

[email protected]

Harpoon Capital514 Reviews

Website View Page

2 Reply

See this reply in the discussion

14 Replies

Jump to latestLatest

Sort by

Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
3y
90% of the deals I turn down think the ARV is much higher than it is. It really depends on the lender.
1 Reply
Keith Richardson
OP
Investor · VT · Member since 2020 · 17 posts · 8 votes
3y
Good point. All the lenders i have talked to have been out of state and don't know the neighborhood which is why I am now reaching out to STL local lenders only.
0 Reply
Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
3y
Quote from @Keith Richardson:

Good day, BP,
I’m trying to understand why hard money lenders keep turning me down on my rehab project.
The deal:
Paid 60k cash for house needing total rehab
Anticipating needing a loan of 150-175k with an ARV of about 325k
The only thing I can think of is that I don’t have any experience with a project of this size.
With interest rates on these loans being 11-12% and my request amount you would think it’s a score on their end.
What do you think?
Gratefully,
Keith

I think its also a harder qualification to get a Hard Money loan for rehab only after you've bought all-cash - changes the deal economics and structure and risk profile on the lender side. Ironically, might have had an easier time if you were requesting a larger hard money loan for both the purchase and rehab
[email protected]
Harpoon Capital514 Reviews
Website View Page
2 Reply
Shafi Noss
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
3y
A $60k asset is not much collateral in case of a foreclosure. A friend of mine might fund this in draws, feel free to PM if you'd like to see if it fits.
0 Reply
Keith Richardson
OP
Investor · VT · Member since 2020 · 17 posts · 8 votes
3y
Quote from @Shafi Noss:

A $60k asset is not much collateral in case of a foreclosure. A friend of mine might fund this in draws, feel free to PM if you'd like to see if it fits.

This makes sense. Truth is, I bought this property off my dad for way less than its current value. Zestimate is 110k
1 Reply
Stephanie MedellinBusiness Member
Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
3y
As mentioned above, it could be the low current value in relation to the repair cost.
It could also be lack of experience, which is a requirement for some lenders.
Unique properties can also be an issue. Is this a site built home, on the grid, with a standard size lot for the area? Unique construction homes like log homes or barndominiums or homes with acreage where most of the value is in the land are harder to finance and might not fit their criteria.
Do they require a certain amount of reserves? A minimum credit score? No derogatory credit history?
To improve your chances, get a really detailed breakdown of all costs with estimates for each portion of the project (plumbing, electrical, HVAC, etc). You'll want details of the types of finishes you plan to install (types of cabinets, countertops, flooring, etc.).
You could even provide photos or renderings of what you expect the finished product to look like to really communicate your plans.  I love boxbrownie.com - they offer photo editing with virtual renovations - https://www.boxbrownie.com/virtual-renovation.
Finally be sure to provide several solid comps to support your finished value. Comps should be within 1 mile (closer is better), sold within the last 12 months (more recent is better), and similar in bed/bath count and square footage (within 20-30% sqft). Unless it's a very rural area with houses very spread out, comps need to be within those ranges. Again, if it's a unique property for the area with no comps and hard to appraise, that can be an issue for many lenders.
You can also let them know your exit plan - either selling or refinancing.
[email protected]
Stephanie Medellin, Loan Factory58 Reviews
Website View Page
0 Reply
Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
3y
Yea doing a refinance based on the ARV is tough in this market if you need the rehab financed. Appraisers have been killing these scenarios left and right. Most lenders will limit you to 85% LTC, so $60,000 + your rehab loan financed in draws. Also you would need to show liquidity.
But it is possible to refinance the current AS IS value with a DSCR loan at 75% LTV.
[email protected]818-269-7983
LuxePrivate Investments LLC 572 Reviews
Website View Page
0 Reply
Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
Quote from @Keith Richardson:

Quote from @Shafi Noss:

A $60k asset is not much collateral in case of a foreclosure. A friend of mine might fund this in draws, feel free to PM if you'd like to see if it fits.

This makes sense. Truth is, I bought this property off my dad for way less than its current value. Zestimate is 110k

If this statement is realistic you have options. You bought good equity. Sounds like you're aiming for a major rehab at a high ARV (luxury stuff). What's wrong with another strategy or a lower price point? What about a rehabbed and lower quality LTR?

It's my understanding HM is the last ditch effort to find money for a rehab. It seems like this was your #1 choice. Unless you exhausted other options I'd consider pivoting and searching for $$$ else where.
0 Reply
Keith Richardson
OP
Investor · VT · Member since 2020 · 17 posts · 8 votes
3y
Quote from @Jaron Walling:

Quote from @Keith Richardson:

Quote from @Shafi Noss:

A $60k asset is not much collateral in case of a foreclosure. A friend of mine might fund this in draws, feel free to PM if you'd like to see if it fits.

This makes sense. Truth is, I bought this property off my dad for way less than its current value. Zestimate is 110k

If this statement is realistic you have options. You bought good equity. Sounds like you're aiming for a major rehab at a high ARV (luxury stuff). What's wrong with another strategy or a lower price point? What about a rehabbed and lower quality LTR?

It's my understanding HM is the last ditch effort to find money for a rehab. It seems like this was your #1 choice. Unless you exhausted other options I'd consider pivoting and searching for $$$ else where.

Yes HM/private lending is my last resort. I’ve talked to lenders about rehab loans and they sound extremely tedious and most contractors shy away from all the extra hoops one has to jump through to satisfy rehab loan terms.
1 Reply
Simmy AhluwaliaPro Member
Lender · Atlanta, GA · Member since 2015 · 1k+ posts · 200 votes
3y
If this property is in Vermont, most lenders don't lend there, as Vermont has some funky business-purpose guidelines, or even none at all.
0 Reply
Keith Richardson
OP
Investor · VT · Member since 2020 · 17 posts · 8 votes
3y
Quote from @Simmy Ahluwalia:

If this property is in Vermont, most lenders don't lend there, as Vermont has some funky business-purpose guidelines, or even none at all.
Property is in St. Louis, MO
0 Reply
Simmy AhluwaliaPro Member
Lender · Atlanta, GA · Member since 2015 · 1k+ posts · 200 votes
3y
Ok, should have mentioned that on the front end. So, what is your experience level? We've financed many in the MO market.
0 Reply
Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
3y
@Keith Richardson So you are a new renovator and you are doing a large renovation out of state. It shouldn't be a surprise that lenders don't want to fund that scenario.
I would suggewt lookoing for hard money lenders that are local to that market. They will know the numbers better than you. They will know if this is a deal worth doing or not.
2 Reply
Mike Klarman
Specialist · NJ · Member since 2022 · 1k+ posts · 650 votes
3y
So, the house is upside down. Paid 60k, putting 150k in it. You are putting 2.5x the value into the house. Lenders do not like that at all. They penalize you greatly in the terms even if they do it.
It's not an attractive loan for a lender. You're saying you are gonna 5.5x the value of a 60k house. It's hard to 5.5x value on a deal, lenders know that so any such deal with numbers like that they deem risky.
2 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.