BRRR quandary

8 Replies

I recently bought a house from two brothers who had inherited the property as part of their deceased mother's estate. I paid them what they were asking for it; almost the cost of the land only. The 90 house needed a full gut rehab since it had been vacant for almost 12 years. I converted and expanded it from a 2/1 to a 3/2, with an entrance foyer, new master bathroom, master walk-in closet, a laundry room, thereby adding 255sq.ft to the original house.

Location: Rapidly changing area with new commercial development less than 1/2 a mile away, and older houses being rehabbed. A sought after charter school. Huge swathe of land in 100's of acres 1/4 block away ready for a developer to swoop in and start building. Very stable neighborhood in transition. 3 exits away from downtown.

The numbers:
BP: $15,600
Rehab cost:$49,000
ARV: $110,000 as of right now
Market rent: $1050

The house sits on a 10,000 sq.ft lot that I intend to get te-platted into either 2 lots, or get permission add a mother-in-law's cottage/structure in the back to be rented out separately.

Following the BRRR principles, I started inquiring about refinancing the house. I was informed the lender will base his loan on the buying price and not the appraised value of the house as it stands.
My point: it is my business savvy to finagle a good deal, create value out of something. This seems like getting penalized for being smart.

Please help me figure out a way someone else has come across for a situation similar to this, and how they were able to get their cash out. Why is the improved asset not being regarded as the product against which to do a cash-out refinance. I intend to keep the house for the long term. I intend to buy more houses and lots in the area.

Thank you.

Originally posted by @Aisha E. :

I recently bought a house from two brothers who had inherited the property as part of their deceased mother's estate. I paid them what they were asking for it; almost the cost of the land only. The 90 house needed a full gut rehab since it had been vacant for almost 12 years. I converted and expanded it from a 2/1 to a 3/2, with an entrance foyer, new master bathroom, master walk-in closet, a laundry room, thereby adding 255sq.ft to the original house.

Location: Rapidly changing area with new commercial development less than 1/2 a mile away, and older houses being rehabbed. A sought after charter school. Huge swathe of land in 100's of acres 1/4 block away ready for a developer to swoop in and start building. Very stable neighborhood in transition. 3 exits away from downtown.

The numbers:
BP: $15,600
Rehab cost:$49,000
ARV: $110,000 as of right now
Market rent: $1050

The house sits on a 10,000 sq.ft lot that I intend to get te-platted into either 2 lots, or get permission add a mother-in-law's cottage/structure in the back to be rented out separately.

Following the BRRR principles, I started inquiring about refinancing the house. I was informed the lender will base his loan on the buying price and not the appraised value of the house as it stands.
My point: it is my business savvy to finagle a good deal, create value out of something. This seems like getting penalized for being smart.

Please help me figure out a way someone else has come across for a situation similar to this, and how they were able to get their cash out. Why is the improved asset not being regarded as the product against which to do a cash-out refinance. I intend to keep the house for the long term. I intend to buy more houses and lots in the area.

Thank you.

You need to talk to a different lender. Ask around and you will find the ones who will lend on appraised vale and not on cost. 

Promotion
Speed To Lead
Buy hot seller leads w/o subscription
Buy daily seller leads that are actually ready to sell
Finally there's a place where you can buy leads that asked for urgent help selling their house
Sign up for free

Hey Aisha,

I did quite a bit of research in my area (Northern VA) and found that it depends on the size of the bank and their internal policies. Some smaller places will do a 6 month refi on ARV. Larger banks I spoke to required 12 months before considering ARV.

So as stated above, you'll have to shop lenders. But one thing I did notice. Everyone I talked to said "this is the national/state/FMFM standard" I found this incorrect in most cases and they were just saying that to encourage me to stop inquiring from others.

FNFM do of course have standards for their loans. But at the end of the day, a portfolio loan from a smaller bank can be distributed at their discretion. It starts to go into that grey "who you know/what have you done for me lately" area after that.

Hope this helps! Don't give up!

@Aisha E. I agree with Ryland and Frank. You need to find another lender that will lend on the current value. Here in Delaware, I have not heard of a bank only willing to lend on the purchase price after renovations are complete. They are basically telling you they are only willing to give you a loan around 15% LTV and you should be able to find a lender to do 70%-75% LTV now that the project is complete. Talk to a lot of lenders, learn their standards, build relationships, and you will find better options.

@Sam Valme

Sam, thank you for the reassurance. I do not intend to give up, but it is extremely frustrating dealing with people who are desk analysts, and cannot think beyond the mainstream mindset. You are right the smaller regional banks, or the 2 branch in a town kind with actual investment banking mindset, and ability to approve by hopping over to the VP's office next door can get you an approval within a week. I know of a small bank here in the DFW area that gives rehab loans before one commences on a rehab project, as an acquisition and construction loan, that can be rolled over into a conventional loan at a slightly higher than market rate. At least one does not have to qualify for loans twice!

Originally posted by @Matt Fish :

@Aisha E. I agree with Ryland and Frank. You need to find another lender that will lend on the current value. Here in Delaware, I have not heard of a bank only willing to lend on the purchase price after renovations are complete. They are basically telling you they are only willing to give you a loan around 15% LTV and you should be able to find a lender to do 70%-75% LTV now that the project is complete. Talk to a lot of lenders, learn their standards, build relationships, and you will find better options.

Matt, 

The lenders prefer you take the loan from them before commencing on the rehab. I used my own cash to buy and rehab because I did not want to sit around twiddling my thumbs, as I had other work going. You are right 15% LTV is a joke. Maybe I can season the transaction for 6 months - 1 year, and in the meantime try talking to many smaller banks, and co-ops the establish a relationship like you suggested.

Not to sound like I am complaining, but it is much tougher for a woman of color to get into the "old boys club" network where everyone seems to scratch each other's backs. My learning curve to handling workers on the field over the years taught me a lot. I can write a whole thesis on women on the construction industry and the barriers to entry and progress. Like in any field, perseverance, and hard work demand success.