What’s Your Biggest Challenge When Financing a Deal?

Question

For those actively investing, what part of financing has been the most difficult lately?

Is it finding a lender that understands the deal, getting comfortable with the terms, coming up with the required cash, or simply getting everything closed on time?

Curious to hear what other investors are experiencing and what strategies have worked for you.

Nicholas Floyd · Answer

For my clients the problem is usually getting denied due to not having a proper funding sequence to go by. It could be their business entity isn't structured correctly, challenged credit, or just simply not knowing the banks or lenders lending requirements etc

Robin Castillo · Answer

For me, it has been qualifying due to issues with my credit. Also depending on the amount sometimes it's hard to come up with the reserves and cc.

Ron Barrett · Answer

I completely understand. Credit, reserves, and closing costs can definitely make qualifying more challenging. The good news is that every deal is different, so it’s always worth taking a look at the numbers first and seeing what options may be available.

Yi Xu · Answer

For me the hardest part has never been finding a lender. It has been the gap between the ARV I underwrote and the ARV the lender's appraiser is willing to sign, because the loan amount comes off the second number, not mine.

Where that gap comes from is almost always the same two places. First, square footage. The listing says one thing, the county assessor says another, and the appraiser uses the county's finished number. On one house I looked at the MLS showed 3,367 sqft while the county had 2,483 finished plus an 884 sqft unfinished basement. At the listing number the price looked like $120/sqft, at the county number it was $163/sqft. A borrower who underwrote on the first figure is going to get a loan sized on the second and find out at the appraisal, which is the worst possible moment. Second, comps. A foreclosure transfer or a deed between relatives shows up as a sale in the data, but an appraiser will throw it out, so any ARV leaning on those is going to shrink the day the report lands.

So my "strategy" is boring: before I apply, I rebuild the ARV the way the appraiser will, county square footage and arm's-length renovated sales only, and I run the loan sizing off that number. Then I stress test it on a 3x3 grid, three sale prices against three rehab budgets, and only go to the lender if the deal survives most of the nine boxes. If it only works in the top box, the problem is not the lender.

Ron, from the lending side, how often does the appraisal come in under the borrower's ARV, and when it does, is it usually the square footage or the comp selection that caused it?

Andy Sabisch · Answer

We recently relocated from PA to MS and am finding that finding a lender that does commerical / DSCR loans is like pulling teeth.  In PA we had a local bank that made financing rentals a breeze and it was simply based on the asset.  We were able to scale quickly and the bank actively supported us.  In MS, we are finding just the opposite.  100 questions about our finances and experience, very few about the asset and then teh rates make many deals a non-starter because we never get into a deal that is not cash flowing from day #1 on the hope it will in the future.  Not our credit score (816) but finding a local lender that understands and supports scaling rentals is like searching for Bigfoot.

Ron Barrett · Answer

I hear you. It’s surprising how different the lending landscape can be from one state to another, especially when you’re used to a lender that understands the value of underwriting the asset and supporting investors as they scale. I may not be a local lender, but nationwide lenders can definitely help you with all kinds of financing, and may be able to provide more flexible options than what you’ve encountered locally.

Robin Simon · Answer

I can't help but ask why you are absolutely needing a "local lender" versus one of the numerous national lenders that excel in this and can span markets despite operating mostly online/remote?  There should be many great options available, the tech is here!

What’s Your Biggest Challenge When Financing a Deal?

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