All Forum Posts by: Reggie Nworie

Hi Orhi, 

That phrase "you can always refinance" can have different meanings, depending on the situation where it's being used. As a private lender, when we say that, we mean we will allow investors to refinance out of their hard money loans and into a DSCR loan at any time. We have no seasoning requirements if renovations were completed, so if you finish a project, you don't have to wait, we can refinance you into a DSCR right away or whenever you're ready.

To answer your second question, there are lots of things that could disqualify the deal or the borrower. Some examples would be if their credit is too low, or the DSCR ratio is too low, or the property market value is too low, there are many things that could be a road block for sure, but as long as the borrower qualifies, the property qualifies, and numbers work, lenders will lend.

We used to offer an all-in-one financing program, but it wasn't very popular among our investors. Mostly because the interest rates are higher than for a standard DSCR loan without the construction component to it. Also, there is the flexibility of being able to decide if you want to sell it along the way and not being locked it.

Hi Grant, 

Yes, there are lenders who can do Ground Up Construction and then convert your loan into a DSCR loan if you want to keep it as a rental. That is something we can help you with. Feel free to connect so we can discuss your deal in detail. I can provide you with some specific examples and illustrations if that helps.

Hi Raul, I would be happy to quote you for this deal. Is the property tenant occupied? If so, how much is the tenant paying monthly? 

Hi Nathan, 

This is an interesting case. I can see both sides of it. 

On the one hand, it is uncommon for lenders to charge for a Pre-Approval Letter. On the other hand, borrowers sometimes take the Pre-Approval Letter with no intention of ever doing the deal with that particular lender. Depending on the lender's process for evaluating borrower approvals, the lender could be incurring costs associated with doing the review (like credit reports, background reports, etc.). 

You should ask them for a complete list of fees. What exactly does the money go towards? What else will they be charging you for along the way if you were to go with them? 

I can understand why a lender may want to charge a fee for that, but currently, it's not common practice. There are plenty of lenders who can give you a Pre-Approval Letter at no cost. 

This article originated from our internal process for selecting contractors for our own projects. This is important because one of the most critical aspects of successful real estate investing is selecting the right contractor to partner with. Whether it's a light renovation project, a ground up construction deal, or just regular maintenance for your rental, finding reliable and competent help is pivotal to the success of your investment property. Often times, investor profitability hinges on the expertise and efficiency of the General Contractor (GC) chosen to lead the project. Selecting the right GC is a critical decision that can directly impact your return on investment. The process of choosing the right GC involves thorough research, assessment, and consideration of various factors. This article will provide some important points to consider in order to make the right choice. 

1. Define Your Project Needs and Goals:

• First understand the specific skills and expertise required for the job.
• Outline the scope of work, timeline, and budget for your project.
• Will the project involve work that requires a license, like foundation, roofing, plumbing, or electrical?

2. Seek Recommendations, Referrals, and Reviews:

• Reach out to fellow investors, real estate agents, or local property associations for contractor recommendations.
• Online platforms and review sites can provide insights into contractors' reputations and work quality.
• Investigate the contractor's reputation by checking various online reviews and ratings on different platforms. 

3. Verify Licenses, Insurance, and Credentials:

• We cannot emphasize this one enough - Ensure the contractor holds the necessary licenses and certifications required by local authorities.
• Verify that they have liability insurance and workers' compensation coverage.
• If your proposed contractor does not have a valid license (in their personal name or their company name) and/or they do not have valid insurance, move on to another contractor.
• Some of the risks that go along with unlicensed contract work include not being able to sell or refinance the property. This can be devastating.
• There are only a few things that are certain in this business. If you choose a contractor who is not licensed for a project that requires a license, you can be certain that you will regret it. 

4. Evaluate Experience and Track Record:

• Assess the contractor's experience in handling similar projects. The more similar their experience, the better.
• Ask for references and portfolios with before and after pictures of past projects that they have completed.
• It is important to get an understanding of the quality of their past work and how their past clients felt about working with them before you hire them. 

5. Conduct Interviews and Ask Pertinent Questions:

• Arrange meetings with potential contractors to discuss your project.
• Inquire about their approach, timelines, subcontractors, and how they handle unforeseen challenges.
• Schedule a call with your lender to speak with your contractor to ensure the draws can be done according to a draw schedule that works for everyone. 

6. Double-Check References and Reviews:

• Contact references provided by the contractor to gain insights into their work ethic, timeliness, quality of work, communication, and professionalism.
• When reading reviews, don’t just look at the star rating, pay attention to “why”. Sometimes a complaint could arise from something the customer did or didn’t do and may not necessarily be a negative reflection on the contractor or there could have been a delay at the county that was outside of the contractor’s control. It’s important to understand the why behind both good and bad reviews. 

7. Obtain Detailed Bids and Review the Work Agreement Contract Carefully:

• Request detailed bids from multiple contractors outlining costs, materials, labor, and project timeline.
• Ensure contracts are comprehensive, covering all aspects of the project, including payment terms and warranties.
• Be on the lookout for loopholes within the work agreement contract that may not be favorable to you.
• Be sure to establish who will be paying for materials. Sometimes, it may be in your best interest to purchase your own materials and just pay for labor/installation.
• You should never pay in full until the work is completed in full. It is often quite challenging to get contractors to come back to complete a project if they have already been paid in full. 

8. Communication and Compatibility:

• Assess the contractor's communication style and responsiveness.
• Choose a contractor with whom you feel comfortable communicating and who understands your vision for the project.
• Be aware of any language barriers. If you do not have a consistent means of translation, consider instead a contractor who speaks your language. 

9. Monitor Red Flags and Gut Instincts:

• Pay attention to warning signs such as unusually low bids, lack of transparency, or poor communication.
• Trust your instincts; if something feels off, it might be a reason to reconsider.
• How well does the contractor pay attention to details? It may seem like a small thing, but it matters. 

10. Start with a Small Project as a Trial:

• Consider starting with a smaller project to evaluate the contractor's performance before committing to larger endeavors. 

Conclusion:

Selecting the right contractor for your investment real estate projects is a crucial decision that requires careful consideration. By defining project needs, seeking recommendations, verifying credentials, evaluating experience, conducting interviews, checking reputations, obtaining detailed bids and contracts, emphasizing communication, and trusting your instincts, you can significantly increase the chances of hiring a contractor who meets your expectations and delivers quality work within the specified timeframe and budget. Investing time and effort upfront to choose the right contractor can save you from potential headaches, delays, and cost overruns down the line, ultimately contributing to the success and profitability of your real estate investment endeavors.

Thank you for the question @Aaliyah Carter. Many times, overvaluation occurs because the borrower (or the investor, or the investors agent, etc.) appeals to the appraiser, asking them to "show them some love" or some variation of that. Appraisers have a range of values that are reasonable for a given market. Within that range, they value the property based on their opinion. If the value ends up on the high end of the range, that by itself may not be an issue if there are sufficient comps to support it. However, if there is enough undue influence, an appraiser could go outside of the market range in order to give the borrower a more favorable value. That is really where it can become a problem. In the same way that you would not want an appraiser to value your property well below the market range, you would not want the appraiser to value your property well above the market range either. In both cases, the value would not be supported by the comps in the market and you may have a hard time selling or refinancing the property at that value if it is an unsupported valuation. 

The main idea is you want the appraiser to value the property fairly and accurately. Lean toward appraisers who are committed to that. And talk to your lender if you are concerned about the property value. Your lender will usually have options to help you navigate the situation. 

Appraisal Risks – Part 2: What Do You Mean the Appraisal is “Too Good”?

This is part 2 of a 2-part series on appraisal risks. In Part 1, we discussed what to do if an appraiser undervalues your property. In Part 2, we discuss what happens when an appraiser overvalues your property.

Introduction:

Fix and flip deals in the real estate market are undoubtedly enticing for both seasoned investors and those looking to try their hand at property flipping. One crucial element in these transactions is the appraisal process, where appraisers assess the value of a property to determine its market worth. While the phrase "showing love" is often associated with appraisers valuing a property higher than expected, there is a flip side to this phenomenon that deserves attention. In this blog, we'll explore the potential downsides and risks when a property gets overvalued.

1. The illusion of Value: Appraisers "showing love" can create an illusion of inflated value, luring investors into a false sense of security. In the fix and flip business, accurately assessing the true value of a property is essential for making informed investment decisions. When appraisers overestimate the value, it can jeopardize potential profits, inadvertently hurting the very borrower they were trying to help. Often, the appraiser has good intensions in their attempt to help the borrower, but overvaluation leads investors to pay more than a property is worth, or spend more on renovations than what is necessary, or expect to be able to refinance at a value that is not in line with their market. Each of these errors can significantly reduce profitability and they increase the risks associated with the project.

1. Overleveraging: An inflated appraisal can also lead to overleveraging, where investors borrow more money than they need. To be clear, we're not talking about a contingency, every investor should always have a contingency. We're talking about overleveraging. Borrowing more money than the deal can support and/or than the borrower can reasonably repay. This situation can be especially precarious in a market downturn or if the renovated property fails to meet the anticipated After Repair Value (ARV). Overleveraging increases financial risks and may result in significant losses for investors.

1. Market Distortion: Repeated instances of appraisers consistently "showing love" can distort the local real estate market. Inflated property values can contribute to a “bubble”, where prices become detached from economic fundamentals. Such market distortions may have long-term consequences, affecting not only fix and flip investors but also regular homebuyers and the overall stability of the real estate market.

Conclusion:

While an appraiser "showing love" may initially seem like a boon to fix and flip investors, the flip side reveals potential pitfalls and risks. It's crucial for investors to approach appraisals with a critical eye, seeking accuracy rather than inflated values. Striking the right balance between optimism and realism in property valuations is essential for a sustainable and profitable fix and flip business. In the ever-evolving real estate market, understanding the nuances of appraisals is key to navigating the challenges and maximizing the probability of success in fix and flip endeavors.

Hi Aaliyah, you asked some good questions. I will first respond to the timing question, then I will address the impact on financing. 

If it is a purchase, the appraisal is ordered when the property gets under contract. If it is a refinance, it would be ordered when the Scope of Work (SOW) is ready or when it is stabilized (if it is a DSCR loan).

A low appraisal value can impact the loan amount that the borrower can get. If it is a purchase, a low value could impact the initial advance or Loan to Value (LTV). The LTV is based on either the purchase price or the as-is value (whichever is lower). If it is a refinance, a low value could be the difference between getting cash out at closing or having the bring cash to closing. Most of the time, the maximum loan amount that can be offered does not exceed 75% or the After Repair Value (ARV). So if the ARV is low and the borrower has a lien that needs to be paid off, the borrower may need to bring cash to closing to make up the difference.

Appraisal Risks – Part 1 of 2: The Appraiser Undervalued My Property. What Can I Do About it?

This is part 1 of a 2-part series on appraisal risks. In Part 1, we discuss what to do if an appraiser undervalues your property. In Part 2, we will discuss what happens when an appraiser overvalues your property.

Real estate investors, mortgage brokers, and private lenders often rely on property appraisals to determine the market value of a given property. However, it can be disheartening when the appraisal comes in lower than anticipated. A low appraisal value can pose challenges, but it's not the end of the road. There are several important steps investors can take to mitigate the impact and potentially improve the outcome.

Before we begin, it is important to understand that if you will be using any form of financing (private money, hard money, or bank money), your lender will typically want to be the one to order the appraisal. There are specific situations where a borrower may want to order an appraisal on their own, but in most cases, it is not necessary. Also, borrower-provided appraisals are often viewed with a level of skepticism because in this situation, the appraiser is hired by and directly working for the borrower. Most private and hard money lenders prefer third-party appraisals that are ordered through an Appraisal Management Company (or AMC). The AMC verifies appraisers by checking things like licenses and insurance and they serve as the liaison between the lender and the appraisers. Part of the AMC's primary functions is to ensure that there is no undue influence on the appraiser. Before you order and pay for an

appraisal, be sure to discuss it with your lender because they may have specific types of appraisal orders that they will accept. Lenders do not typically base their loan on a borrower-provided appraisal.

Understanding the Reasons Behind a Low Appraisal:

If the appraisal has been ordered correctly and the values come back lower than expected, there are steps you can take. Before taking any action though, it's crucial to understand why the appraisal value might be lower than expected. Various factors can contribute to this including:

1. Market Fluctuations: Real estate markets are dynamic and subject to fluctuations. Changes in market conditions since the property was last assessed can influence its current appraised value.

2. Appraiser's Methodology: Different appraisers might use varying methods or have different interpretations of data, leading to discrepancies in valuation.

3. Property Condition: If the property has structural issues, maintenance problems, or lacks certain amenities, it can impact the appraisal value negatively.

4. Comparable Sales: Appraisers heavily rely on comparable sales (comps) to assess a property's value. A lack of recent or suitable comps close to the subject property can result in a lower appraisal as well.

5. Bias: Whether conscious or subconscious, there is no denying that bias can exist when it comes to property valuations. Unfortunately, human beings have biases and sometimes those biases show up in the appraisal report. 

Here Are Some Important Steps You Should Consider:

1. Review the Appraisal Report Carefully:

• * Carefully review the appraisal report to ensure accuracy in property details and comparable sales (comps) used.
• * Identify how far the comps are from the subject property?
• * Note the lot size and Gross Living Area (GLA) figures for the comps. How do they compare to the subject property?
• * How many bedrooms and bathrooms do the comps have and how do they compare to the subject property?
• * Look for potential errors, omissions, or misstatements that could affect the value of your subject property. 

2. Dispute the Appraisal Values:

• * Engage the AMC and inform them of your desire to dispute the appraisal values. The AMC will provide the form that is required for appraisal disputes.
• * Create a well-researched list of comparable sales to be presented in the dispute. Be sure to make it compelling because AMCs typically only allow 1 dispute per order.
• * Look for comps that are within 1 mile of the subject property. Comps that are more than 1 mile away but less than 5 miles away may be considered but will typically not receive the same weighting as comps that are within 1 mile of the subject property.
• * Comps that are over 5 miles away are often not considered at all. Typically, comps that are far away are also an indication that there could be other issues with the investment scenario. (For example, if you drive 5 miles in the city, you would be in a different neighborhood and property values could be very different there. Also, rural properties rarely have comps that are all within 1 mile of the subject property, so comps that are 15 miles away are usually seen as a red flag if the lender does not lend on rural properties).
• * Since appraisers often pull comps from MLS, they may not be aware of certain private sales. In situations like that, borrower provided comps can be very helpful when it comes to increasing the likelihood of a successful dispute.
• * Present any additional information or data that could positively impact the property's value.

3. Renegotiate with the Seller:

• * If the property was under contract, a lower appraisal can affect the agreed-upon price.
• * Consider re-negotiating the purchase price with the seller for a price reduction to better reflect the market value of the property. 

4. Seek a Second Opinion:

• * If you have disputed the appraisal but the results were still not satisfactory, be sure that you have a good understanding of why the value(s) were low.
• * If the appraiser’s justifications for the lower-than-expected value(s) are not satisfactory, it may be time to seek a second opinion.
• * Advise the AMC to ensure that the new appraisal is sent to a different appraiser.

Conclusion:

A lower-than-expected appraisal value can be disappointing, but it's not a definitive setback for real estate investors. By taking proactive steps, such as reviewing the appraisal, engaging with the AMC to dispute the values, renegotiating with the seller, or seeking a second opinion can help drive better outcomes for investors.

Ultimately, each situation is unique, and the best approach will depend on various factors surrounding the property and the market conditions. Flexibility, adaptability, and a strategic approach will empower investors to make informed decisions and potentially turn a low appraisal into an opportunity for growth and increased value in their real estate investments.