The question I get all the time is: If I’m paying such high rates, why won’t the lender fund 100% of my purchase price plus all of the rehab construction, plus the points and the interest?
Well, they might. If you have a long relationship built over a number of successful transactions and you delivered 100% and never tripped up. Or if your deal qualifies for transactional funding. But most of the time that’s not the case, so here is why, or why not:
First, the high rates and points. Almost always, these deals don’t qualify for bank or conventional financing. They are the highest risk deals. If I had a fund that did these loans, I think it would be a junk bond if it were traded publicly. So remember, an empty multi or a house with no roof (or kitchen, or septic, or whatever) is considered a very risky deal. You are paying high rates because of the risk in the deal. The lender is compensated for his/her additional risk with higher rates, because if the deal goes bad, it is very expensive to recover. Ask me how I know.
Now for the 100% question. When you are engaged in a project, emotionally, intellectually and financially, you will do everything you can to make it successful. If the deal goes bad, because of declining property values, or other reasons, and you have no money in the project to lose, well guess what can happen? You can choose to walk away. Homeowners are doing it every day. So can investors. We want to make sure you are fighting to get the deal done and sold. We don’t want to have to finish the project. If we did, we’d be doing rehabs ourselves. (Did I tell you I’m really awful at managing contractors?) So, once again, here’s the explanation without sugar-coating. The borrower has to have a stake in the outcome. Skin in the game. If you don’t have the cash, you can also provide that “skin” by cross collateralizing another property. Talk to us about this.
What about paying monthly interest payments? Having to pay the monthly payments keeps that outgoing cash flow right in front of you. It’s too easy to forget how fast it builds up if you’re not paying it. And the project can drag on. Which costs a lot of money. We want you to make money, and we want you to make lots of it. You should make lots more than the lender makes.
So I hope this is helpful. It may not make it easier to swallow (without the sugar-coating) but at least you know why. And if you have more to offer the lender, tell him/her so. They may consider modifying the terms somewhat if you provide them with additional security. “An educated consumer is our best customer” as an old tv commercial used to say.
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