What would you do?

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What would you do?

Member since 2019 · 5 posts · 0 votes

Hi everyone,

Im under contract for a STR and just got the loan estimate back. It was not what I was expecting. I was expecting to put 20% down and have an interest rate of about ~8%. Due to the appraisal of the house and the DCR being negative, my loan estimate is now 25% down and an interest rate of 10.5%!! My initial investment will be around 30k more than I calculated for.

I am using some cash and a HELOC to finance the purchase of this property. My worry is if the house doesn't perform like its supposed to. What would you guys do?

I estimate the house would gross ~60k. Heres the numbers on the house.

purchase price - 380k
loan amount - 285k

Interest rate - 10.5%
estimated expenses - 3.6k

Estimated monthly gross - 5k

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Leslie Anne Morris

Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes

I’ll go against popular belief here and tell you my recent deal. Dec 2022. Paid top of market price, ended up with 10% rate at closing table - couldn’t back out. No contingency would allow that. Would have been in breech of contract. Closed. Forced appreciation - this is key - had my remodel / rehab team kill it in design and value add.

But then literally two months later a drunk driver hit my cabin. Tragic. No cash flow for 2 months. Insurance kicked in thank goodness - interviewing my agent on YouTube tomorrow.
So then we are back up and running and it’s literally all rainbows. Just filmed an episode of a massively popular TV show there. I signed an NDA so can’t disclose what it is yet but it will be airing soon.

July did awesome but it’s my first super good month unfortunately and I had stayed there a week with my family.

Anyways, that’s my story. The key for you to takeaway would be the forced appreciation / value add. Focus on what you can do and not what you can’t. Fear will have you back out. Do keep in mind though that you’re going to need cash and cash reserves to weather that storm. So for that reason it may not be for you. Only you can decide.

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Caleb Brown
Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
3y
How did you calculate the nightly rate/gross income? You want to be conservative so be careful not to lose your skin
0 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Connor Eigen:

Hi everyone,
Im under contract for a STR and just got the loan estimate back. It was not what I was expecting. I was expecting to put 20% down and have an interest rate of about ~8%. Due to the appraisal of the house and the DCR being negative, my loan estimate is now 25% down and an interest rate of 10.5%!! My initial investment will be around 30k more than I calculated for.

I am using some cash and a HELOC to finance the purchase of this property. My worry is if the house doesn't perform like its supposed to. What would you guys do?
I estimate the house would gross ~60k. Heres the numbers on the house.

purchase price - 380k
loan amount - 285k
Interest rate - 10.5%
estimated expenses - 3.6k
Estimated monthly gross - 5k

Easy pass
1 Reply
Dave StokleyBusiness Member
Property Manager · Cleveland, OH · Member since 2015 · 699 posts · 799 votes
3y
$60k gross on $380k purchase makes it a borderline deal for me. Bad loan terms make it a pass. Who was the lender?
3 Reply
Connor Eigen
OP
Member since 2019 · 5 posts · 0 votes
3y
Quote from @Dave Stokley:

$60k gross on $380k purchase makes it a borderline deal for me. Bad loan terms make it a pass. Who was the lender?

I used a broker, the name of the lender is hometown equity mortgage
0 Reply
Connor Eigen
OP
Member since 2019 · 5 posts · 0 votes
3y
Quote from @Caleb Brown:

How did you calculate the nightly rate/gross income? You want to be conservative so be careful not to lose your skin
I used airdna along with doing my own research on Air and Vrbo.
0 Reply
Peter Dorinsky
Real Estate Agent · Columbus, OH · Member since 2020 · 149 posts · 193 votes
3y
You can always worry about your property not performing regardless of how good your numbers look. It's going to come down to trusting your numbers and your research.
1 Reply
Jesse Turner
Insurance Agent · Gainesville, GA · Member since 2023 · 99 posts · 89 votes
3y
Quote from @Connor Eigen:

Quote from @Caleb Brown:

How did you calculate the nightly rate/gross income? You want to be conservative so be careful not to lose your skin
I used airdna along with doing my own research on Air and Vrbo.

Search this forum for other conversations about the reliability of AirDNA. You'll want to get really picky about which comps you use for justifying your revenue projections.

Consider location, amenities, ramping period (including likely discounts for first guests), as well as "x" factors like design and theme of the top-performing properties in your neighborhood.
2 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3y
Quote from @Connor Eigen:

You can anticipate short-term rental income to drop in the next couple of years. You may even lose the option if your market decides to crack down on short-term rentals, which is also very likely.
I would pass.
The DIY Landlord Book4.7248 Reviews
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Dave StokleyBusiness Member
Property Manager · Cleveland, OH · Member since 2015 · 699 posts · 799 votes
3y
Quote from @Nathan Gesner:

Quote from @Connor Eigen:

You can anticipate short-term rental income to drop in the next couple of years. You may even lose the option if your market decides to crack down on short-term rentals, which is also very likely.
I would pass.

It already has been, but that’s just a general trend. There are still tons of opportunities if you know where to look.
1 Reply
Leslie Anne Morris
Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
3y
I’ll go against popular belief here and tell you my recent deal. Dec 2022. Paid top of market price, ended up with 10% rate at closing table - couldn’t back out. No contingency would allow that. Would have been in breech of contract. Closed. Forced appreciation - this is key - had my remodel / rehab team kill it in design and value add.

But then literally two months later a drunk driver hit my cabin. Tragic. No cash flow for 2 months. Insurance kicked in thank goodness - interviewing my agent on YouTube tomorrow.
So then we are back up and running and it’s literally all rainbows. Just filmed an episode of a massively popular TV show there. I signed an NDA so can’t disclose what it is yet but it will be airing soon.
July did awesome but it’s my first super good month unfortunately and I had stayed there a week with my family.
Anyways, that’s my story. The key for you to takeaway would be the forced appreciation / value add. Focus on what you can do and not what you can’t. Fear will have you back out. Do keep in mind though that you’re going to need cash and cash reserves to weather that storm. So for that reason it may not be for you. Only you can decide.
5 Reply
Sarah KensingerPro Member
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
3y
This happened to us as well.... loan changing due to a negative appraisal, etc.

We let the property go, got our EM back and haven't regretted it once!
[email protected]330-557-3021
2 Reply
Leslie Anne Morris
Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
3y
Quote from @Sarah Kensinger:

This happened to us as well.... loan changing due to a negative appraisal, etc.

We let the property go, got our EM back and haven't regretted it once!
Different scenario. You are so lucky! I couldn’t do that in my case. Thankfully I made the right choices and it all worked out for me.
0 Reply
Sarah KensingerPro Member
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
3y
Quote from @Leslie Anne Morris:

Quote from @Sarah Kensinger:

This happened to us as well.... loan changing due to a negative appraisal, etc.

We let the property go, got our EM back and haven't regretted it once!
Different scenario. You are so lucky! I couldn’t do that in my case. Thankfully I made the right choices and it all worked out for me.
Sorry I just now read your comment....my goodness what a story! I agree with your thought of making the property into something extraordinary to make up the difference, that seems to work if you have the funds on hand to add those "extras".
We had a financing contingency so that's what saved us. We literally backed out the day before that contingency ended; it was so close!
[email protected]330-557-3021
0 Reply
Leslie Anne Morris
Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
3y
Quote from @Sarah Kensinger:

Quote from @Leslie Anne Morris:

Quote from @Sarah Kensinger:

This happened to us as well.... loan changing due to a negative appraisal, etc.

We let the property go, got our EM back and haven't regretted it once!
Different scenario. You are so lucky! I couldn’t do that in my case. Thankfully I made the right choices and it all worked out for me.
Sorry I just now read your comment....my goodness what a story! I agree with your thought of making the property into something extraordinary to make up the difference, that seems to work if you have the funds on hand to add those "extras".
We had a financing contingency so that's what saved us. We literally backed out the day before that contingency ended; it was so close!

Oh!!! Ha ha ok. Got it. It notified me and I thought it was a reply to my comment specifically.
0 Reply
Sarah KensingerPro Member
Real Estate Consultant · OH · Member since 2023 · 2k+ posts · 1k+ votes
3y
Quote from @Leslie Anne Morris:

Quote from @Sarah Kensinger:

Quote from @Leslie Anne Morris:

Quote from @Sarah Kensinger:

This happened to us as well.... loan changing due to a negative appraisal, etc.

We let the property go, got our EM back and haven't regretted it once!
Different scenario. You are so lucky! I couldn’t do that in my case. Thankfully I made the right choices and it all worked out for me.
Sorry I just now read your comment....my goodness what a story! I agree with your thought of making the property into something extraordinary to make up the difference, that seems to work if you have the funds on hand to add those "extras".
We had a financing contingency so that's what saved us. We literally backed out the day before that contingency ended; it was so close!

Oh!!! Ha ha ok. Got it. It notified me and I thought it was a reply to my comment specifically.

How strange...I wondered if something like that had happened. I've gotten the same type of notification but then my name isn't in the comment and it's unrelated to me. Must be a glitch or something....

[email protected]330-557-3021
0 Reply
Chad McMahan
Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes
3y
Quote from @Connor Eigen:

Hi everyone,
Im under contract for a STR and just got the loan estimate back. It was not what I was expecting. I was expecting to put 20% down and have an interest rate of about ~8%. Due to the appraisal of the house and the DCR being negative, my loan estimate is now 25% down and an interest rate of 10.5%!! My initial investment will be around 30k more than I calculated for.

I am using some cash and a HELOC to finance the purchase of this property. My worry is if the house doesn't perform like its supposed to. What would you guys do?
I estimate the house would gross ~60k. Heres the numbers on the house.

purchase price - 380k
loan amount - 285k
Interest rate - 10.5%
estimated expenses - 3.6k
Estimated monthly gross - 5k

Unfortunately, this is a frustrating and common problem, that results from low appraisals. I hate that appraisers hold so much power over the process. Most appraisers own zero real estate and are resentful about market values, etc. Also, appraisers can get in trouble if they come in high, but don't get in trouble if they come in low. I've been problem solving this for years.

Sometimes it's worth it to proceed when you get appraiser-screwed, and sometimes you have to pass. Had to say, based on your info. Have you tried for a "reconsideration of value"? Your real estate agent and lender should help you with this.
0 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
I think anyone paying these record prices with 10 percent mortgages will not end well in the next several years.
2 Reply
Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y
It would be a pass for me. I applaud @Leslie Anne Morris for kicking a$$ on her purchase, but sometimes that just isn't possible. You would have to see if it is something you could replicate.
1 Reply
Leslie Anne Morris
Real Estate Agent · Smoky Mountains, TN · Member since 2022 · 1k+ posts · 984 votes
3y
Quote from @Michael Baum:

It would be a pass for me. I applaud @Leslie Anne Morris for kicking a$$ on her purchase, but sometimes that just isn't possible. You would have to see if it is something you could replicate.
Thank you sir (in my best cabin lady southern accent) 🤠
1 Reply
Account Closed
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
3y
@Connor Eigen hard pass for me. Especially since you are using a heloc for part of the down payment. So there are more interest charges on top of the already bad loan.
0 Reply
Zak Marinko
Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
3y
@Connor Eigen Probably a pass. Especially thinking of how important it is to have adequate cash reserves, having an unexpected hit to your cash at closing can really hurt a deal. Not sure of your exact scenario, but if I were in your shoes it would probably be a dealbreaker for me
0 Reply
Tim Bratz
Developer · Charleston, SC · Member since 2015 · 100 posts · 91 votes
3y
The best approach to underwriting any deal is to really stress test the numbers. We always try to kill deals based on a number of different facets involved in the underwriting.
0 Reply
Alex ScattareggiaPro Member
Investor · Cabo San Lucas, Mexico · Member since 2023 · 150 posts · 139 votes
3y
Lets assume the 5k monthly top line is correct.
Correct me if my numbers are wrong here but the monthly expenses number seems quite optimistic.
Mortgage is going to be 2.7k. So, you are calculating $900/month in additional expenses? This deal is pretty thin margin to begin with, but I think you are being quite optimistic with the expense number.
Good luck, saying no to marginal deals is equally as important as saying yes to great ones.
2 Reply
John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
3y
Quote from @Alex Scattareggia:

Lets assume the 5k monthly top line is correct.
Correct me if my numbers are wrong here but the monthly expenses number seems quite optimistic.
Mortgage is going to be 2.7k. So, you are calculating $900/month in additional expenses? This deal is pretty thin margin to begin with, but I think you are being quite optimistic with the expense number.
Good luck, saying no to marginal deals is equally as important as saying yes to great ones.

90 percent of deals done right now are in similar situations or worse with the underwriting, but some people are still throwing the dice. The issue is the interest rate being so high. People are trying to get too crafty here, a few will succeed most won’t.
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