I've got one HML I've been using regularly and they're at 10% and about 7 pts. Someone new I'm just using is at 12% and 4pts. They'll both go up to 100% of 65% of the ARV though so thats really nice.
Would I'd like to see is what I'm getting to be honest. The only thing that would really help is the length of the term. I'd like it to go 15 mos instead of 9 or 6. Since I mostly buy and hold, I need the additional time to refi out. And sometimes it takes a while depending on seasoning reqs.
Also, for those HML's that do require money down, it would be much better if they held that money in escrow instead of putting it in the deal.
So for an 80k loan, instead of having me put down 8k or 16k with a loan amount of 72k or 64k. Keep the loan amount at 80k but put the money into escrow. That way, if my LTV is all good, I can do a rate and term refi to pay off the 80k loan and then the HML would refund me the escrow money so I'm little to no money out of pocket.
The HML wins because they get interest on the 80k loan AND they get the additional security of the 20% that they're holding in cash in the escrow.
And I win because I don't have to leave my 10 or 20% cash into each deal.
That is what would really be a big value from all the HML's. Although the ones I"m using are already doing it so I can't complain.
Around here 13/4 is pretty standard, with some lenders as high as 15/5.
I'd like to see 10/2 with no payments until construction actually begins. (Permits in Atlanta take 40-70 days to issue, and making payments while you're sitting around waiting on the city stinks.)
I'm in the same market as Aaron McGinnis. I've heard about everything from 12/2 to 15/5, and they all pretty much lend up to 70% (give or take) of the ARV, purchase plus rehab, with the borrower having to put in about 20% of the total (give or take).
The rehab draws are done after inspections, generally 1-3 times throughout the project.
As for what I'd like to see? The cheaper the better. I currently borrow at about 10/0 (private lenders), so if I could get something similar from an HML, I'd consider going that route.
Just FYI, money can't earn interest unless it's disbursed and there is some accounting matters as to accruals but it's not difficult to account for. But consider a the time for construction and the cost of money sitting idle to disburse say 3 or 4 months later.
Some places it's customary to make the full loan and then hold in escrow, usually with discounted rates if it's significant money, I'd bet HMLs would not consider thier money was not at risk and charge whatever they could get.
The loan amount is considered with each borrower's experience, If I have 25K going to a contractor who has done hundreds of jobs and 20 years in the business, I'm not dolling out in disbursements, bam, he gets the money an it's on the clock. That same amount to a guy on his 4th rehab, well, lets see what materials are needed to get started and call me when you have that done, I'll inspect (or have inspected) and then write another check.
If a lender can't figure how many sheets it may take of 5/8 T&G on a 2400 sq ft house, I suggest they hire out the inspections. The other issue is, while I can figure that, it's time consuming to reviwe material lists, invoices, paid receipts and go make sure the material is actually on that job site, so having the funds run through a title company or management service might be better, just pass the expense along.
Dealing with experienced contractors, ones you can trust, at reasonable loan amounts is much easier.
The total loan amount is to the LTV of the finished product.
Disbursements can be on time, like weekly, with receipts and lien waivers provided after the seed money is given for start up, the liens and material receiptss for that seed money presented prior to the next draw. The least risky way.
Or, a 100 k laon may be done in 25K amounts, at different stages of completion, a little more risk.
Or, the highest risk, just dump the money at one time and hope for the best, LOL. :)
Hans: This is simple to answer for California … once again the government tells us exactly how to do it. For loans over $100k that are sold by brokers to trust deed investors the government allows us to go up to 75% of ARV for NOO rehabs, as long as we follow a few *simple* government mandated rules, like, third party fund control, fully funded loan at origination, detailed draw schedule, independent third party inspections, full appraisal, remedies on default clearly spelled out, etc.
Of course, if the loan is a percentage of purchase price the government mandated procedures are a little simpler. Did I mention how simple life is now that the government tells us exactly how to invest our money:(
J Scott- so do they determine ARV, (After Repair Value) and lend up to 70% of that amount up front? Even before the repairs are made?
Or do they hold some of that back and give draws as progress is made?
Also 10/0 is great money- you would not find that in South Fla.
Thanks for the reply sir.
The 10/0 is private money, just like Jon Klaus...
The 70% is the maximum that will be loaned against the entire project, though the initial loan (to close on the purchase) will only be up to the purchase price.
The remainder is disbursed in draws throughout the rehab.
So, for example, you have a house that is being purchased for $50K, needs $30K in rehab and has an ARV of $100K. Lender will loan a maximum of about $70K (70% of ARV), with $50K disbursed at the purchase closing to purchase the property and the other $20K disbursed after construction inspections throughout the project.
I've got one HML I've been using regularly and they're at 10% and about 7 pts. Someone new I'm just using is at 12% and 4pts. They'll both go up to 100% of 65% of the ARV though so thats really nice.
Would I'd like to see is what I'm getting to be honest. The only thing that would really help is the length of the term. I'd like it to go 15 mos instead of 9 or 6. Since I mostly buy and hold, I need the additional time to refi out. And sometimes it takes a while depending on seasoning reqs.
Also, for those HML's that do require money down, it would be much better if they held that money in escrow instead of putting it in the deal.
So for an 80k loan, instead of having me put down 8k or 16k with a loan amount of 72k or 64k. Keep the loan amount at 80k but put the money into escrow. That way, if my LTV is all good, I can do a rate and term refi to pay off the 80k loan and then the HML would refund me the escrow money so I'm little to no money out of pocket.
The HML wins because they get interest on the 80k loan AND they get the additional security of the 20% that they're holding in cash in the escrow.
And I win because I don't have to leave my 10 or 20% cash into each deal.
That is what would really be a big value from all the HML's. Although the ones I"m using are already doing it so I can't complain.
Mike's suggestion is an old bank arrangement that HMLs should look at, but instead of escrowing money it might be cleaner in some states to assign a CD. Saying "escrow" can mean that a demand for amounts on account mat require the other party to release the funds by state law, so investigate that issue. A collateral assignment is more appropriate. That's a good point Mike!
You want your refis to be a no-cash out transaction. This way that 80K loan on a 100K property can be refied at the 100% of cash invested, take the cash collateral and move on to the next one. :)
@Mike H. -- what you suggest is being practiced by at least one HML in Denver, which has the info down below on their site. This is obviously targeted at the fix-and-refi investor like yourself, and is most definitely a great way to maximize ultimate financing on a deal. I don't know how common this is, but it certainly seems very straight-forward for a HML to implement. Since you indicate that your HMLs already do this, it must be pretty common.
"100% Financing Using Down Payment Reserve:
MMTC offers an innovative way to assist fix-and-hold real estate investors with their desire to build rental portfolios with little to no cash out of pocket after the refinance is obtained. MMTC will typically require 10 to 20 percent of the purchase price plus repair amount at the time of property purchase and loan closing; however, if desired by the Borrower MMTC will hold the down payment in a "Down Payment Reserve Account" and will make the loan for 100% of the costs of the project. When the loan is paid off, the Down Payment Reserve Account is refunded to the Borrower. The benefit to the Borrower is that when they refinance the loan it will be possible to refinance for an amount equal to 100% of the costs without seeking a "cash out" refinance to recover their equity. The down payment reserve account is fully documented for the borrower via a security agreement and is shown as a line item on the HUD closing settlement statement. In the above example, the loan amount would be for $170,000 and the "Down Payment Reserve Account" would be $17,000 which would be held by MMTC until the loan is paid in full, and then refunded to the Borrower. It is recommended that someone wanting to use a Down Payment Reserve get preapproved, before he has a contract on a property, not only with MMTC, but with the conventional takeout lender as well. MMTC can refer you, if needed, to such takeout lenders for your consideration."