Flipper/Rehabber · saskatoon, saskatchewan · Member since 2015 · 32 posts · 4 votes
Hey guys comments please....gave my lender a scenario and he came back with this, definitely going to talk with others as well
Good Morning Ryan, typically when we are valuing properties that a member has purchased and renovated we look at the original purchase price plus the renovations
to a certain extent. IE if you buy a house for 50k and put 20k we would say the house is probably worth 70k. Now if you buy a house for 400k and put 400k into it, that house would not be worth 800k. Now in your scenario with an appraisal we would look at the
appraisal value compared to the cash spent value and decide if it is reasonable. For Example if you have 70k into the place and the appraisal comes in at 100k, we would not lend you 80% of the 100k as we would end up having the total price of the place plus
another 10k financed on our end and would then be carrying the risk entirely. Long and the short of it is unfortunately it varies by the situation and I cannot give you a definite answer based on the knowledge we have today. Thanks!
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
6y
Ask them about their "seasoning period" or how long you need to own the property before they will simply lend on the appraisal. With some banks, it's six months, some a year and I've seen as much as two (mostly back when the 2008 crash was in recent memory). Some banks will lend on appraised value as soon as the property is fixed up and rented. This is ideal, but harder to find. If they aren't willing to lend at appraised value after a reasonable seasoning period, I would look for another bank.
Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
6y
Hey @Ryan Myers, lenders can so frequently be fueled by fear and cowardice more than any other feeling. You see this come out in things like this. What would they say if you bought it for $100k, rehabbed it for $100k, and it appraised for $500k?
"We want you to have some skin in the game."
SKIN?!? How about the blood, sweat, and tears that the hustle it took to find and execute this sweetheart of a deal took? Is that not skin? Is that not sharing the risk?
Grr. . . . rant over.
Your best play would probably to be looking for a way to conventionally refinance this, which would (hopefully) look far more at the appraisal value that the cost approach.
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
6y
The simple matter of fact is that in the real world appraisals are not definitive statements of value. They may be the best we have but they are not definitive. Banks learned this lesson painfully in 2008-09, and they are going to look skeptically at value added plays unless there is a transaction involved (and thereby you have the willing buyer test met as well as an appraisal). I agree with Will above that cowardice knows no bounds in banking but on this one I have to say they are not being entirely unreasonable.
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
6y
Ask them about their "seasoning period" or how long you need to own the property before they will simply lend on the appraisal. With some banks, it's six months, some a year and I've seen as much as two (mostly back when the 2008 crash was in recent memory). Some banks will lend on appraised value as soon as the property is fixed up and rented. This is ideal, but harder to find. If they aren't willing to lend at appraised value after a reasonable seasoning period, I would look for another bank.
That’s ridiculous. What’s the point of the appraisal? This is why investors don’t tell the truth on the rehab. If you put in 25K, you end up telling them 50K-60K. It’s such a cat and mouse game.
Thanks guys! All well points raised forsure, cat and mouse game indeed, like why the appraisal then? What about all my risk and efforts on finding and funding the deal, and asking for a simple refi? And here’s the appraisal.....yet they have no problems throwing money at you on your principle residence here on refi’s....my 5 year term just expired and we renewed and they were like ohh do you want to refinance....but yet when it’s the other way around they want to make things so difficult
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
Just use a different lender. This is not a NORMAL policy in any way. Most cash out refi conventional do not know or care what you spent on the rehab for all they know the market could of just appreciated in the area.
Lender · Grand Rapids, MI · Member since 2019 · 175 posts · 82 votes
6y
@Ryan Myers what kind of lender were you talking to? Hard money, commercial, or typical lender offering Fannie/Freddie. Commercial or hard money are goi g to just have rules they set I. Their guidelines and rules complaining about those is like complaining about the rain. Standard Fannie Freddie lender you either wait to do cash out, or if you qualify for delayed financing. Only few scenarios that they would care about purchase price plus renovations. As others have noted typically a Fannie/Freddie just going to care about appraisal and nothing else.
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
They are lending based on LTC (loan to cost). This is not at all uncommon and I worked at a lender that always refinanced based on LTC regardless on the amount of time the property was owned. I always told potential borrowers up front that they'd be best served to find a lender who refinances based on ARV. That is what you need to look for. There may be less of them out there in this climate, but it's worth calling around.
Flipper/Rehabber · saskatoon, saskatchewan · Member since 2015 · 32 posts · 4 votes
6y
@Alan Lacey
Yeah this was a bank, not the big 5, but a credit union bank. I get the feeling that I just need to get that first one under my belt and build on the relationship with them and things could be better going forward
Flipper/Rehabber · saskatoon, saskatchewan · Member since 2015 · 32 posts · 4 votes
6y
@Odie Ayaga
Thanks Odie! Yeah LTC which would mean I would be leaving a portion of my money in the deal which would completely wipe out my capital over a few deals
Rental Property Investor · Member since 2020 · 172 posts · 110 votes
6y
This seems insane to me. What if you do the work yourself over six month. You spend $5,000 on materials but it would have cost $50,000 if you paid someone else to do the job, instead you put in hundreds of hours.
I would definitely talk to other lenders, in my experience I've been pleasantly surprised by how different lenders are. What one will say is the absolute law the other will just shrug their shoulders at.
Rental Property Investor · Member since 2020 · 172 posts · 110 votes
6y
Another thing that lenders will take into account is if you have renters and what the renters are paying. The income generated by a property can trump everything else.
Investor · Philadelphia, PA · Member since 2014 · 133 posts · 49 votes
6y
It sounds like the scenario they are responding to is for a refi within their seasoning period. If you are trying to refinance within 6 months of purchase, it’ll be challenging (not impossible) to find a lender that will refinance based on appraisal value. Their response is more in line with a refinance based on the delayed financing exception.
Rental Property Investor · Hendersonville, NC · Member since 2016 · 446 posts · 412 votes
6y
If this is a traditional loan, they will all likely have a 6 month seasoning period, after which they will loan on LTV, beforehand it will be the lower of LTC or LTV. If it is a commercial loan, etc then it is more lender specific, but it is common that the seasoning period is 6 or 12 months.
Rental Property Investor · Fishers, IN · Member since 2016 · 335 posts · 470 votes
6y
The bottom line is appraisals should be based on the market comps in the surrounding neighborhood, ie sales comparison appraisal method. If its a commercial loan, the lender will likely look at using the income appraisal method as well, and sometimes loan to cost. How much you bought the property for should be completely irrelevant, as should your rehab costs. I'd keep looking for another lender.
I have rentals that have appraised for way more than I know I could sell them for. I've also been disappointed with a few that have appraised for less than they are worth by a quite a bit.
Lenders need to protect themselves, I get that. My experience with appraisals is that its ultimately a crap shoot.
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Ryan Myers Lending might be a little tight... but this lender does not understand what you are trying to do and is not a good investing partner. I challenge you to call 10 investor friendly lenders this week :). You'll see what I mean.
Lender · Frisco, TX · Member since 2019 · 546 posts · 270 votes
6y
@Ryan Myers when did you buy the property? Like a couple others have said if it’s within the last six months then you’re only eligible to take out about 70 to 80% of the purchase price of the property. This will sort of depend on the value of the property and how many units there are two. Certainly I’ve seen the situation and one of my realtor friends pointed out that when you buy a house or rent a house out, you expect things like working windows and a working roof. I see people get really excited about putting in new windows or a new roof and dump a lot of money into it, but at the end of the day those things should a given so it doesn’t necessarily increase the value of the house by an amount equal to the amount of money spent on these updates.
Another thing that I see is for example with custom homes, I don’t think it sounds like this applies to your situation, but if there are nice extras like imported wood floors or beams, an appraiser won’t necessarily notice those things and won’t really consider them in the value of the house so we see values come in low.
And yes, it certainly can be a little bit of a crapshoot with the appraiser. I’ve seen people contest appraisals but I have not seen a lot of success with it and it seems like it’s really kind of just poking the appraiser in the eye.
This seems insane to me. What if you do the work yourself over six month. You spend $5,000 on materials but it would have cost $50,000 if you paid someone else to do the job, instead you put in hundreds of hours.
This is a very good point. How does to lender know what your costs are? You may have told them already upfront, but imagine if you hadn't. They ask you what your rehab costs were, and you add all your material+contracted work+(YOUR TIME)*(A REASONABLE HOURLY RATE), and tell the. I'd be sure you can back up your calculation somehow (don't just make something up). You probably didn't spend $100k of your time on the deal (hopefully!), but may be a way to recoup some of your capital if the lender is going with this LTC method.
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
6y
A conventional lender will use a licensed independent appraisal (which you pay for) which uses closed sales of like kind square footage in close proximity in prior three months. That valuation is an opinion. Cost valuation sometimes is used by a hard money lenders but not by conventional lenders.
Single family non owner occupied you may get 70% of appraisal but there are HUGE pricing adds for a cash out refinance. Although the base rate might be low, you will pay .5 for a refinance and 2.75% for nonowner occupied and 1% for the cash out today thus converts to rate of about 4.875 APR 4.908 if your FICO is above 764. To get a conventional loan you have to qualify with your IRS taxes 2018 2019 and 2020 income. Before you apply ask what their ins and outs of rules are. Rates change several times a day and this is not a commitment to lend nor is it a rate commitment. Everyone has equal opportunity to apply for a loan.
Thanks guys! All well points raised forsure, cat and mouse game indeed, like why the appraisal then? What about all my risk and efforts on finding and funding the deal, and asking for a simple refi? And here’s the appraisal.....yet they have no problems throwing money at you on your principle residence here on refi’s....my 5 year term just expired and we renewed and they were like ohh do you want to refinance....but yet when it’s the other way around they want to make things so difficult
If your 5 year term expired and they still won't lend to you at appraised value, you definitely need to find another bank. (Although I should note, banks also need a property to hit their debt service requirement or ratio, which is usually a net income to annual debt service ratio of 1.2; that can sometimes limit the amount they're willing to lend on rentals as well.)
Flipper/Rehabber · saskatoon, saskatchewan · Member since 2015 · 32 posts · 4 votes
6y
Thank you everyone for your opinions and comments, much appreciated. So I called a investor friendly broker today which was referred to me, and told her what I'm wanting to do and what I'm looking for. So I purchase my first deal in my corporation, which I will be the guarantor for at least 2 years so the holding company can generate 2 years of taxes. Which will look good because I have a good credit score and income to take the risk off the lender. She also mentioned she has lenders that will lend on ARV and because its an investment property it will be 75% LTV. Also sounds like no seasoning period. I told her it will be under 100K for purchase and repairs. She's going to reach out to her lenders and touch base in a week. Sounds more promising than my first approach to the small credit union.