hail mary - need advice

11 Replies

I'm not sure which forum this should go into so I just picked the lending and mortgage advice forum. Hopefully it will be the right one.

I need some ideas. I'm running out of ideas, cash and time. I'm not sure where else to turn so I'm hoping someone on here can help.

TL;DR - I need advice on securing a construction loan for about $750k to do renovation to a 9 unit residential apt building that is currently uninhabitable and therefore making no money after a casualty loss a few years ago. Banks keep telling me various things: no room in their portfolio, loan is too big for them, we need more equity, the as-complete appraised value won't be high enough, etc. even though banks are also telling us the rents are fine but those other reasons keep popping up to block the loan from even getting to the appraisal stage again. 

Long version:

3 years ago I had lightning hit my, at the time, mixed-use apt building that I had only purchased 8 months prior, so I had barely touched the principal. Through some miscommunication, to say the least, with the insurance broker the building was also insufficiently insured but had enough to allow the primary lender to approve the loan. Two loans were taken out: a bank was primary lender and then a smaller loan with owner financing.

I hired a contractor to repair the roof from fire damage, encapsulate the smoke, dry out the building, and perform mold mitigation. That consumed most of the insurance money.

We waited a year for them to give us an estimate for reconstruction and they never gave it to us. Lots of money wasted waiting on them. Finally got a different contractor and had an estimate within a few months. Took it to the bank. They approved it. Got an appraisal and the appraisers screwed us to make a quick buck. Bank denied based on appraisal. We since got a third contractor involved to get the cost down even more with more work being done. But we've been dealing with banks for over a year now. I'm running out of banks in my area to talk to. I'm literally talking to the last one or two that have returned my initial call.

I'm almost to the point of needing to use personal income to pay bills for the property and not having enough in reserves to even make payments on a construction loan even if I got approved again. BB&T have told me they will loan up to $750k but they are imposing $150/unit/mo repair reserves (even for new construction) which kills my NOI and causes the DSCR and LTV to fail because I can't get rents up enough to compensate for $16k/yr being held in repair reserves.

I need someone who will either trust me enough to be an investor/partner with me who has serious cash lying around and wants to entrust it to me (it would held by the bank though) or trust me enough finance me completely. I can provide more details offline if anyone is interested. I doubt hard money would suffice at this point since interest rates are so much higher on those loans, plus they probably aren't intended to go for a full year, which is what our contractor estimates construction time will be.

thank you


Because there is no cash flow it is high risk. I think you’ll end up having to find private money. I could be wrong but in this situation unless you have a great track record with things like this a bank will not finance this

@Mayer M. Although I sort of see your point it also sounds like circular logic. There is obviously no cash flow right now but that's because of the state the building is in. Putting money back into it to make it even better than it was will obviously allow it to cash flow again, even more so than it did before for that matter. I've not actually had any bank say it won't work because of "no cash flow". I have had banks say the as-complete valuation won't be enough, which is based on the cash flow of course, but they all know that the building can be in the black. I'd be comfortably in the black with my rent projections (which are based on comps in the area rather than my pie-in-the-sky view as a stressed out landlord; my wife is a real estate agent as well so she has seen the comps).

It simply makes it more risky for the bank because there is no cash flow not that that is the sole factor it’s just a big factor. If any bank will do it it will be a small local community bank otherwise Hardmoney or private money

Fix one unit, rent it out. Save money, fix another unit, rent it out. Continue until you need to borrow less money. If you only needed $300K, there would be no issue in getting financed.

Have you told your primary lender (bank) that without the necessary financing you are prepared to walk away. If that doesn't move them then you need to consider selling to minimise your losses.

@Anthony Dooley  

It may come down to having to sell but with the building being unhabitable and really only existing as a shell  of a building (with interior still needing some demolition to begin reconstruction) we wouldn't be able to get much for it. The appraisal we had a year ago claimed a market value only about 15k below what we had originally paid for it, despite the fact there is no infrastructure in the building. Only 15% was adjusted for 'interior finish' by the appraiser. Although that was generous of him we knew it wasn't realistic. I doubt we'd get enough to pay off the primary note (or the owner financing) but it would be a start. But since it wouldn't pay off either note I'm unsure what would happen at that point, such as for example, whether the bank would then call the remaining principal balance due all at once or let us continue making payments.

As for your other recommendation, the idea of 1 unit at time won't be possible since there isn't any infrastructure in the building. There will be 9 units across 3 floors so at least a couple hundred thousand would be required in the beginning. But I get your idea. 

We'd also need to borrow enough to get enough units completed to have income but not borrow too much where the rent for those same units couldn't cover the payments for what we borrowed. A difficult catch22 for sure. Another idea is to do a floor at a time. Still dicey though, given we'd have to invest a lot up front for just basic infrastructure before even having money required to finish specific units. And the big question in my mind, because of not doing something like this before, is how does an appraiser appraise the building in that situation and would a bank even go for that type of situation? 

I can ask the contractor to try calculating the construction costs for the first floor but I think he is getting tired of working on stuff for us without seeing any light at the end of the tunnel with a bank.

@Thomas S.

Yes the current primary lender is aware of the situation. They aren't willing (and they are small so they may be unable) to finance the reconstruction. The only thing they are willing to do so far is to become 2nd lienholder on the new loan, but since both loans have to be included in debt calculations their willingness to be a 2nd only helps me in a situation where the new bank can't do the full amount of the construction cost and taking out the current primary loan. At the time that would have resolved one issue with BB&T since they only allowed 750k for the loan (and at the time our construction costs were still above 800k) but other things killed the deal with them as I originally mentioned.

And I haven't told them I'm prepared to walk away but have told them that we don't have the personal income to pay for the loan payment and insurance and property taxes every year. in their underwriting I'm assuming they only cared about the loan payment. If it was just the loan payment then, sure, it would suck but it would be doable. That's a whole other issue I don't know how I'll deal with if and when the time comes (which will be soon). And given the state of the building as I mentioned to Anthony, if I let them foreclose and then they sell it they would surely get much less than the principal balance so then the they would come after us for the difference. But it may be the easiest option. I'm screwed regardless what happens if we don't get a loan. I'm just hoping I don't lose my house.

Sounds like you need a HML, but that depends on what you owe, estimated rehab costs and the ARV. I'm not sure if the numbers will work with out knowing. Additionally, what is the cash flow going to look like once you reposition the property? Need to make sure you have an exit strategy and able to refinance into an end loan if you go the HML route.

This seems to be the key point:

I have had banks say the as-complete valuation won't be enough, which is based on the cash flow of course, but they all know that the building can be in the black.

Banks typically want something better than just being "in the black". Banks want to see a debt coverage ratio well above just being in the black. I think they are saying that with the additional money you need that the total debt is going to be so high that the the projected income is too low to satisfy their DCR guidelines. They're also saying that even once its fixed up, the value is not high enough to cover you loans and get be below the maximum LTV they want.

And, honestly, I think they are telling it to you straight.  You suffered a large, uninsured loss.  I know the feeling, I've been there, though not as large as yours.  That means a big chunk of cash needs to come out of someone's pocket to make up for that loss.  The lenders are telling you its coming out of your pocket.  Do you have other assets that could be leveraged to generate the cash you need?

I also see a problem here:

Through some miscommunication, to say the least, with the insurance broker the building was also insufficiently insured

We waited a year for them to give us an estimate for reconstruction

Got an appraisal and the appraisers screwed us to make a quick buck.

Fundamentally, this is your error by not having adequate insurance.  The quoted statements point the finger at others.  But at the end of the day it was you that bought the insurance and you that waited on the estimates.  And I'm missing how an appraiser makes a quick buck from giving a inaccurate appraisal.   You're among friends here, so expressing your frustration is fine.  Hopefully you're a little more humble when dealing with the folks that might get you out of this mess.

As far as what happens if you default on the loans, get out the promissory notes and read them.  Commercial loans can be non-recourse, which means they would not be able to come after you.  However, even non-recourse loans often have "bad boy carve-outs" that can create liability for you if you are at fault.  Its possible to inadequate insurance would create liability even with a non-recourse loan.  Here's a sample (though I won't link to the ad page where I found this):

Unfortunately, there are new trends where lenders are extending their "bad boy" carve-outs to include things like not sending financial reports on time, not paying real estate tax on time, or not having proper insurance on the property.

Emphasis mine.

If you cannot come up with the cash from other source to get the deal back on its feet, selling may well be the best alternative.  Even though you have to take a steep discount for the condition, that will almost certainly be a better price than what it will bring at a foreclosure sale.  You might be able to negotiation a short sale with your existing lenders to reduce what you owe, if the loan terms do allow recourse.

@Jon Holdman Actually the revenue supports a DSCR up to 1.28. The issue I most frequently have been encountering depending on the cap rate is satisfying an 80% LTV due to needing to cover the existing loan plus the new construction loan. I've put $189k into the project so far for repairs since the fire but banks are not viewing that as cash equity but rather just "including" it by virtue of inherently being part of the as-complete value. We don't have any other add'l cash ourselves to inject into it.

The appraiser who did mine made a quick buck off a bad appraisal by not taking the time to create an accurate appraisal as a result of:

1. using a building that was vacant for over 3, if not 5, years as a comp (thereby not validating the comps in their files before using them in future reports), 

2. comparing a 95% newly renovated building (mine) to one that was reported to me by the property mgmt company to have not been renovated in over 5 years and didn't have central A/C and heat for the units or in-unit W/D but yet, despite those differences and not making adjustments for them, specified in the appraisal report that rent for my units would still be only $650 for a 3BR even though the comp's units were being rented for $750,

3. claiming that my projected rents were above market rate (rent ranged from $850-1025 for 2-3 BR) but yet using a comp that was 2 addresses down from my building that had a 3BR unit with rent of $950 (but the report was done so hurriedly the appraiser didn't even put the rent for that comp in his report; I had to call the owner to obtain it),

4. and suggesting that $50 should be the spread between 3BR/1BA units and 2BR/1BA units. 

The above 4 items are just the largest of many errors in the appraisal but the common theme is that all the errors (minor and major, both substantive to the final value and not) indicate an inaccurate report based on out-dated information that leads to performing a grossly negligent assignment. 

The rents they said my units could garner are below even what HUD FMRs are for the area. The appraisers told the bank they could get it done in 1 week (despite others in the area needing at least a month because of their backlog and just the inherent time it takes for commercial appraisals). But these guys did mine in x days. Their 'reconciliation' process for the 3 approaches was merely to average the income and sales valuations despite stating in their report that the income approach made the most sense. If it did then they contradicted themselves by simply averaging them nor did they provide a valued service due to never explaining the rationale for the averaging or the rationale for choosing certain values they choose from numerical ranges in other areas of the report.

I found an old appraisal they did for a utility company 2 years prior which contained the exact same sentences in the reconciliation section which proved all they do is copy/paste across their appraisals. That isn't necessarily a bad thing but for the parts that are unique a copy/paste isn't adequate.

The insurance on the building was known by the bank. They didn't question it since the insurance was adequate for their lien so that's all they cared about.

Updated 10 months ago

Another item that goes toward the appraisers just wanting to make a quick buck is the fact that the rents they stated would be possible in the as-complete scenario were actually lower than what our rents were prior to the casualty loss. How much sense does that make? They didn't seem to care about that logic issue when questioned. They still felt their data was valid.

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