70~75% LTV of ARV for a developer

[Shu Zhu]

Hi All, I'm exploring to be a private or hard money lender. Went to a meet up today and learned that a developer, who seems to have a good track record based on his own account, usually borrows at 70~75% LTV of ARV for rehabbing projects. My reaction is the loan amount could then be well above the acquisition cost of the property. Does this make sense? Or because it's an established developer so more favorable terms are expected?

[Mike Reynolds]

Originally posted by @Shu Zhu:

Originally posted by @Timothy Maloney:

Hi @Shu Zhu. You too can rehab a property with a 70%+ loan to ARV. Let's say the purchase price is $50,000 and the Rebat costs will be $50,000 and the property has an ARV of $149,900. You could borrow 90% of the purchase plus draw 90% to 100% of the rehab costs at closing because both amounts combined are less than 70% of the ARV. It's not cheap - but cheaper than hard money.

I wish you luck flipping in the great state of Texas!!

Thank you. I'm not a flipper, instead I'm exploring to be a lender. Here is what I'm confused based on your example: in this scenario, the lender is out $45,000+$45,000=$90,000 at closing? But the property at this point is worth only $50,000, since no repair is done yet. Then isn't the loan much greater than the value of the collateral at closing? Hypothetically if the rehabber went into bankruptcy right after closing on the purchase, then the lender would already be $40,000 in the red. If the property can be rehabbed by someone else for another $50,000, that leaves only $9,000 margin, not counting all the expenses, which means the lender will still lose money. Am I wrong in this thought process?  Or the key is to manage rehabber/developer risk?

 I'm not a lender so I may get corrected but in your example the second 45k would be in the way of draws as the work progressed. That way the lender doesn't hold as much risk. That's the way I've seen it done anyway.