Is borrowing on LTV real?

24 Replies

Hi BP! I called several hard money lenders a few months ago and they all said they would lend 80% LTV but that their LTV is based on purchase price. Listening to BP podcasts and reading Brandon Turner’s book on investing with little to no money, I was under the impression hard money lenders would lend based on appraisal value, not purchase price. Does this not exist anymore? Thanks in advance!

The hard money lender usually is their own appraiser. They will look at what you have it under agreement for and then do their own homework to decide if the numbers work. They dont have an appraiser come to the property.  The hml will give you some percentage of the purchase price and then usually 100% of the rehab costs

@Elenis C. Hard money lenders will usually have a LTC limit and an ARV limit. So you'll need a down payment of the purchase price, but will be able to borrow above that in order to pay for renovations.

The answer is that on purchases most lenders will always lend based on the lesser of the two.  

Example 

If your purchase Price is 150k but your appraisal comes back at 130k 

your loan will be based on the as is value of 130K 

@Jason D. I've found properties that appraise for higher than the wholesaler is asking, so if the lender did LTV based on appraisal, then I would not have to put anything down. When I called them they said 80% LTV on purchase price so for that I just use a bank with a lower interest rate and do 20% down. Have you found any that would do based on appraisal in Florida?

@Elenis C. Every HML I've dealt with does LTC on the purchase, then ARV as a max with renovations. That's what I always expect when making a deal, and it's only a temporary outflow of cash, so it doesnt bother me much

If the property has been purchased already then yes. 

But when you are looking at purchasing the property then no. 

Meaning If you purchased a property at auction for 100k then the next day wanted to take out a loan against the property but the as is value is 150k the lender will base it on the as is not the purchase. 

Of course there are exceptions but the property really either has to be in demand or have a ton of equity that can be explained along with the difference in the price tag. 

A lender never wants to be upside down in a deal 

@Jason D. If you don't mind me asking, they lend you 100% of the renovation costs? Then you refinance the property? I saw you did your first BRRRR in May, congrats!! That's my next goal as well. I live in New York but am originally from Florida and invest in Jacksonville. Haven't been able to find a property that a BRRRR would work for. Do you purchase foreclosures? Or you purchase off the MLS?

@Elenis C. Sort of.... I paid 20% down payment of the entire loan amount at closing, but they then reimbursed me 100% for my rehab going forward. Then, yes, I refinanced almost all of my money back out on a 30 year mortgage. That BRRRR was a foreclosure listed on MLS.

@Elenis C. for a brrr to work welll where you can cash out most of the money you put into you need to make sure your total costs ( purchase holding reno ) are 70 to 80 percent of the final appraised arv. That way when you get long term financing you can pull most if not all of your cash out. 

ARV = 200k

Total costs  need to be no more than 140k. 

The hard money people are going to make sure they get all their money back after the project is done, and they will figure this out before they commit to funding the deal for you, or require you to have more skin in the game.

@Rich Hupper Yes I've been looking for deals like that as well. Different strategy than this post. Here I was wondering if HML lend on appraisal value or purchase price. It seems to be purchase price only. Unless you know of any that do appraisal value?

@Elenis C.

Some HMLs will limit the initial draw (draw of funds to purchase the property) to 75-80% LTV

However, they will lend additional funds for renovation. (Making the total loan based off of ARV)

Typically HMLs will have a limit to how high of a percentage renovation funds can make up of the total loan amount.  

If you have other properties with equity, you might try a cross collaterilization loan

@Elenis C. Depends on the HML, your track record, and the property. I have hard money guys that will lend me 100% of the purchase price if it’s conservatively < 70% of the appraisal price (as-is)
@Elenis C. A lot of HML’s will factor experience and return customers into the equation. Experience counts as a form of leverage when workIng wIth prIvate money, meaning they will be more likely to lend a lager percent LTV when they see you have investments under your belt.

Hard money lending is a generalized term at this point. True hard money lenders lend against the asset and the ARV . When companies are not lending against the ARV it is because their funds are institutionally backed and requires extensive bank underwriting. The funds they deploy are bank funds essentially.

@Elenis C. I've been lending money on commercial and residential properties for a long time. I have never lent money based on appraised value without considering the purchase price. Lenders want you to have some of your own money in the deal. I have heard of HML that will lend you 100% of your purchase price + rehab funds up to 100% of rehab cost, but they won't exceed 70% of the after repaired appraised value. I don't see that very often and it is generally more expensive.

Much more typical is lending you 80%-90% of your purchase price at closing + up to 100% of your rehab cost with the combined loan amount not exceeding 70% of the ARV.

When you refinance, the lender will lend you up to 75% of the ARV (sometimes 80%). Depending on the type of loan, you may not get to 75% because the cash flow will not be sufficient to support a 75% loan. Ask lenders how they calculate that cash flow.

As stated above, analyze your total costs going into the project so you can calculate how much of your cash will remain in the property once you refinance.  

@Elenis C.  Maybe, perhaps you could share some details on the properties purchase price, what you think its as-is value is and why, the location and type of property, and your experience?  With that info, I might be able to recommend a hard or private money option that's a good fit.

@John D. Sure. The property is in Florida. Listed for 68k and needs about 20k of work. The as-is value is around 90k and ARV is over 120k. It's a SFH. I have one rental property that I rehabbed after the tenant abandoned and increased monthly cash flow by $125 (31%). We are closing on the second property this month. Purchased both using conventional loans but I wanted to get into using hard money to avoid putting 20% down. Since I had heard most offer 90% LTV, I assumed it was on appraisal value, not price. If it's only on price then I might as well continue with conventional loans as I'm qualified for them. Please let me know what you think. Thanks for the help!

Per my original comment, if the as-is value is $90k, I would expect an investor with a moderate amount of experience to be able to borrow 70% of that ($63k).  Add in a couple of points, and closing costs, and the $5k differential on the purchase price, and you are out of pocket maybe $12-14k on the purchase.

If you are looking to borrow against the ARV, expect $63k towards the purchase, and another $20k or so in draws against a rehab/repair schedule, given the ARV.

This assumes a track record and moderate amount of experience.

I am not sure where you heard "most offer 90% LTV", but in my experience you are looking more like 70% of value, if the PP is below market, for someone with a decent track record and at least a few recent wins in their belt. Most HMLs that offer 90% of LTV are looking for seasoned professionals, or are discounting the appraisal value, or both.