Tired of hearing "NO"

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Tired of hearing "NO"

James Klafehn
Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes

I have been on this forum for a while now. I realize one of the biggest problems in real estate is finding capitol to invest with. At the risk of sounding just like one of the many other people complaining about the difficulty finding capitol here goes my story....

I am currently developing a property, or trying to at least, and I cant find enough cash to continue building. Without wasting too much of your time about the property, business or location, I can assure you its a slam dunk. From day one I have been netting thousands of dollars a month with minimal investment. I have shelled out tens of thousands of dollars on an amazing set of construction plans, site plans, permits etc yet the loan I was planning on being there, fell through. I have gone to 4+ banks over the course of 2 years and I keep falling flat. I have put together an amazing business proposal for the banks but I keep getting denied.

I'm at my whits end! This project is literally a home run yet I cant find a penny to throw at it. After receiving the first couple "no's" I decided to build the first duplex on my own. I used cash, low interest credit cards, and I did much of the work myself in order to save money and get it done. It was completed last June, rented months in advance, and the tenants are still there, happy as can be. But most importantly, the house was profitable from day one.

Cut to today, I have been looking for a large loan to continue construction of 3 more duplexes and I have come up flat. I am so sick of applying for loans and hearing banks tell me "No".  There is zero reason to deny me the funds. All of my investments are making money hand over fist. I am in a great area and the housing I am building is in HUGE demand. I want to blame it on the fact that traditional banks are unreasonable but instead of pointing a finger I am hoping to find another way. I dont know any private lenders and I really prefer not to give equity in my business away but I dont see any other way to continue on with my progress.

Any advice?

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Charlie Fitzgerald
Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
10y

You have a situation that is hampered by your unwillingness to properly position this "project" for the lending you are seeking. You have a residential use development parceled as a commercial project. 4 assets on one parcel is not going to be looked at seriously by any conventional lender/commercial lender. You need to subdivided it most likely. Your next issue is that you are not into the project with any of your own money (debt service is not investment capital...it's debt), and your "equity position" is based on an incomplete project profile. Lastly, you're looking for the money in an arena that is not likely to provide fruitful (as you have discovered) and rather than waste more time doing it wrong, I would start by repositioning the project so it can be attractive for a Private Investor, Crowd Funding Campaign or JV with someone that has the cash to complete the project.

Good luck.

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  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    Tagging @Jerry Padilla. He's based a couple hours away from you but might have some ideas

    1Reply
  • Bill Hamilton
    Denver, CO · Member since 2015 · 251 posts · 123 votes
    10y

    Well, looking at it from a conforming lenders standpoint, you are asking (one scenario) for $210k to complete one more duplex, while the lender would be paying off a first of $160k. So before closing costs etc. you have a $370k loan against an appraised value of $450k. Take $360k/$450k and you have an LTV of 85% (over 80%). With a 610 score, that's not going to happen except maybe in a JV loan.

    Or look at it another way, according to the appraisal, you have two duplexes (I am assuming that based on the posts but I could be misinterpreting that), meaning even with the additional land they are worth $225k each. Lending $210k for finished value of $225k would again mean lending at 95% LTV. That's just not realistic for normal bank lending.

    Also, based on the figures I am using, I only see the property being worth a tad over a million rather than two, if you drop 3 more onto the land.

    But this is the hard part of only getting the condensed information. If I had the appraisal in front of me along with your proposal to the banks and breakdown of income and expense for the properties I could probably narrow down your issue.

    Unless I am missing something, I would venture your only option is JV money currently.

    0Reply
  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    10y

    I too, think you need to subdivide because I can't see a bank or other lender give you money without being in the first position. They wouldn't get anything if you decide to peace out, I know, you won't but they don't kow that. Once you subdivide then you have land that would be free and clear and can at the least offer that as colateral.

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    Hard money?

    0Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    Alright, if I cant find a hard money loan or private investor Ill subdivide and try it all again.

    Thank you for your input! What a great site!

    0Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    @James Klafehn

    My personal opinion is to subdivide the lot, at least for the current property, then do a cash out mortgage on this duplex. It will give you the money for the next project and then keep doing the same thing until they are all built. Duplexes will qualify you for a conventional mortgage, with a fixed low interest rate, and a term out 30 years.  You are going to show that you make enough money to support the payment with the rental income you show. You will also have to have cash reserves in the bank. 

    0Reply
  • Account Closed
    Rental Property Investor · Vancouver, WA · Member since 2014 · 308 posts · 144 votes
    10y
    Originally posted by @James Klafehn:

    Thank you for the post. Yes being a landlord is hard. And yes, I know how difficult Cities can be to work with. I also pay for mandatory inspections and reinspections. I had to pay for a $500 key box so the fire department can get into each apartment if there is ever a fire. It was a new rule the city officials decided to enact this year. That was in addition do the mandatory electrical inspections, heating inspections, fire safety inspections and code inspections that are required every 4 years. Ithaca is a hard place to do business but it can be rewarding.

    I have been doing this for a while now. I have definitely had more than my fair share of problems but I overcame them all one by one. I pride myself on being good at that. But this issue, with the banks, is especially crappy. I have done my homework, I have adapted, they tell me no for X reason, I solve that, then there happens to be a Y reason, solve that, then there is a Z reason. It so frustrating. Meanwhile I see other large developers come into my area putting up these huge apartment buildings that don't conform to current zoning restrictions. They get approved anyway and then they get huge tax abatements.

     No worries!  It does suck from time to time, I agree. :)  But it'll be worth it soon enough! :)

    0Reply
  • Mike F.
    Investor · Denver, CO · Member since 2015 · 570 posts · 521 votes
    10y

    Sounds like you got it resolved.

    On a side note - you seriously collect DNA from your tenants dogs to find out which one is pooping and not picking it up?

    0Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    @Mike F. I havent needed to yet. It was a threat so tenants make sure they pick up after their animals. After 3 years here, poop in the park hasnt been an issue, yet. But as the property grows Im sure eventually there will be that one tenant who thinks they dont need to pick up after their dog and yes, in order to keep myself and all of the other respectful dog owners happy, I will definitely use that option if I have to.

    0Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    I just thought I would update this thread quickly. I still don't have funds secured. I received some good tips and potential funding avenues thanks to this thread but I haven't fully vetted any of them yet. The leasing season is in full swing here in Ithaca and it has been keeping me busy.

    Surprisingly a friend of a friend has heard of what I am doing here and loves it. He wants to invest but needs to run it by his wife and lawyer. Considering how many times I have gone through this, I am not going to over think it.

    Personally, I am feeling very frustrated with the whole process. A friend reminded me, "If it were easy, everyone would be doing it.". It was a nice reminder, I just wish there was a little less clawing and scratching for each deal.

    1Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    I was just denied for a HELOC on the property. I was hoping to pull equity out so I can pay off my credit cards. After paying those off and having one HELOC payment instead would make my DTI much better. Unfortunately the resulting DTI was still too high for the banks perimeters so they said no to the HELOC.

    So at this point I am at a loss. The loan from a friend of a friend fell through. I've also reached out to 20+ private lenders I found on this site but they either "don't invest outside of their area", they "don't invest in NY", or all of their capitol has been handed out.

    I am going to take all of my income and dedicate it to paying off these cards as fast as possible. Maybe by winter I will be able to get my DTI to a place that banks will work with me.


    I am considering taking on a partner so I can grow this company faster but I that is my absolute last case scenario. I really don't want to give up equity in my company or the income that I am enjoying. I also honestly don't know the first thing about taking on a partner. But that's a topic for another thread.

    0Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    How do I go about subdividing? Who do I contact first and whats the process? A survey company? A lawyer? Someone else?

    I already know that the town will allow me to subdivide the 10 acre lot into 5 plots without filing for any special variances.

    Any idea roughly how much it would cost?

    Thanks!!

    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    10y

    @James Klafehn After reading through the thread, I'm trying to simplify the situation to help come up with a solution.  So you basically have 4 units total, worth about $450,000.  Currently owe $160,000 with a 610 credit score.  Would like to take cash out. 

    For an investment property, you can borrow up to 70%, which would be $315,000, but you need at least a 620 credit score for conventional loans.  Would $155,000 ($315,000 - $160,000) be enough to pay off your credit cards and give you a start on the next duplex?  

    You should be able to pay off debt through the loan, and your DTI would be based on your financials with the accounts paid off. Unfortunately the credit score is based on the current score, not your "after I've paid off my debt" score, so you would need to raise it by at least 10 points.

    If you can build another duplex with that cash out, you would be up to 6 units and be in commercial loan territory. By then your credit score should have improved by paying off your cards, which could help you qualify for the next cash out refinance based on value with 6 units.

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
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  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    10y

    If you're strictly looking for construction financing that would be a totally different scenario with different types of lenders, especially when you would have a total of 10 units.

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
    WebsiteView Page
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  • Jorge P.
    Investor · New York, NY · Member since 2014 · 153 posts · 126 votes
    10y
    Here's an idea💡 if your goal is to lower your DTI and bring up your credit score. Call up your creditors and negotiate your current debt. If successful , they will restructure and update your debt amounts.. Which will lower your DTI with no money coming out of your pocket. Hopes this helps.
    0Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    @Stephanie Medellin, yes that's pretty much right. Since starting this thread I have paid off 3 of my 11 cards so my score is higher. I also live on the property myself so an owner occupied HELOC is what I applied for last. I could've received a HELOC up to 90% LTV. But yes everything else is correct.

    We all know that there are 3 credit bureaus that all have different numbers (my current score ranges from 625-699 right now) but I have just learned that banks use different "scoring models" and come up with completely different numbers. The last bank (the one that denied the HELOC) told me their scoring model gave me a 609. She told me that each bank uses its own "scoring model" based on their own risk assessment of the applicant. I need to look in to that more. My credit score has never been this low before so I have never encountered this.

    I am not strictly looking for a construction loan. I have applied for everything, a commercial loan, a home equity loan, a HELOC, construction loans, private lenders, friends, and none have worked out. They cant get passed the credit card debt, DTI, and the fact that I was 30 days late on 3 payments last year. I built the duplex and got married and cash got tight for a couple months. I have never been late on a payment ever in my life but missed a couple last year. So between those things, banks keep saying "no".

    So my plan is to keep paying down the debt and possibly subdivide the property.

    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    10y

    @James Klafehn That's a good plan and definitely one way to go. I didn't realize you were living in the property - have you applied for an FHA cash out refinance? Credit score minimums are more flexible, DTI is more flexible, and you can go up to 85% LTV (going off of the $450,000 appraisal that would be $382500). If you have not asked about FHA, maybe you just weren't directed to the right loan type. If you just recently finished construction, I honestly am not sure if that would make a difference. You generally would need to be in the property for a year, but if you were in the other older duplex for a year that might be a possibility, as long as you have your COs for the newest duplex. If your score is above 620 and wanted to go conventional (75% LTV if you live there) you would save on mortgage insurance, although you can get more cash out (85% LTV) with FHA.

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
    WebsiteView Page
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  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    @Stephanie Medellin, I didnt specifically ask for a FHA refinance. I was hoping for a HELOC so I could have access to cash as needed. Id still prefer to go that route rather than having a new set payment that was higher.

    I am still wondering about subdividing. Is it better to subdivide the 10 acre property into 5 - 2 acre plots or to keep it all one parcel? As far as I see it some of the pros/cons include,

    1. Possibly a lower property tax liability for one large parcel as opposed to 5.
    2. It may be easier to find loans if they were 5 separate lots.
    3. No upfront cost to continue as one tax map. Subdividing would cost money.
    4. With one large parcel I can get a HELOC and continue building equity in the property.
    5. If I subdivide and I get 5 separate loans on the property that will get me closer to that 10 loan limit and banks may be more difficult to get money from in the future.

    Most people in this thread suggested that I subdivide. Is that really the way I should go?

    0Reply
  • James Klafehn
    OP
    Investor · Freeville, NY · Member since 2014 · 131 posts · 37 votes
    10y

    I am all ears. Ill send you a PM.

    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    10y

    @James Klafehn HELOCs aren't something I deal with as a broker; they just aren't offered through wholesale lenders anymore, so I don't really have any input there. I imagine that once you exceed 4 units on the property you are going to have a much much harder time finding a HELOC because it's now a commercial loan. There aren't too many lenders that want to be in 2nd position anymore.

    You make a good case for keeping it as one property.  Also take into consideration what is the value of a duplex on its own lot vs. a small apartment complex.  

    If you plan to keep expanding in the future buying small investment properties yes it might be more difficult or expensive to get financing once you have more than 10 financed properties.  Commercial loans don't count at all in that limit of 10, whereas 5 smaller loans would.  I don't know that it's necessarily easier to get a loan on the smaller units, but trying to find any lender to go in 2nd position behind your first mortgage is going to be the bigger challenge.

    I think a lot of people were suggesting subdividing as a more immediate solution to get financing to build on the other lots (ie construction financing to build a duplex on a lot owned free and clear).

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
    WebsiteView Page
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  • Account Closed
    Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes
    10y
    Send me a PM James Klafehn I may have a way for you being in the private equity business for several years
    0Reply
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