Recently I've been calling local credit unions and banks asking about financing for multi-family properties. I’ve never done one of these loans before so it’s a new experience for me.
I’ve started writing a checklist of questions to ask the bankers making sure I don’t miss out on any important information.
I don't have a complete checklist for the commercial side yet but I do when calling hard money lenders. I've personally done four hard money loans the last two years and helped set up financing for many others.
Most are very similar on down payment, interest rate and length of the loan. While those are the most pertinent, the devil's in the details.
Below is a list of questions that might not get brought up on the initial call but still useful when understanding the loan in its entirety.
-Is the origination fee paid up front or at the end?
Origination fees are how lenders make their money. Lenders who keep loans in their portfolio charge the origination fee at the end of the project. Most today ask for it up front.
Origination fees are anywhere from 1-2%. If your down payment is 10% and your origination fee is 2%, your out of pocket is really 12%.
On a 500k loan that could be an additional 10k you have to bring to the table if you didn't know beforehand.
You're going to be paying it regardless but knowing if you have to bring more money to the table is important.
-Is there an extra point for rehab financing?
For those who don't know, one point is equal to one percent of the loan amount, half point is equal to half percent, etc. For example, one point on a 300k loan is 3k.
To obtain rehab financing, one lender may charge a flat two points regardless if you get a rehab loan or not. Another lender may charge one point for servicing the loan and one point for getting a rehab loan.
My first deal I ended up paying two points for servicing and one point for a rehab loan.
-With a rehab loan, is interest paid on the entire loan or as you borrow?
Most hard money lenders charge on the principal amount plus the rehab you've borrowed to date. Others charge on the principal amount plus the entire rehab even if you haven’t borrowed that amount.
Here’s an example: You have a 400k loan and 100k rehab budget for an all in loan amount of 500k. The interest rate you get is 10%. Let’s say you’re early off on the project and only used 20k of the 100k. You’d being paying interest on 420k which is $3,500/month.
Other lenders charge interest on the full 500k regardless if you’ve used the 20k or not. That means you’re monthly payments throughout the entire loan amount would be $4,167/month.
It’s a small thing but can save you thousands if you're unsure.
-Do you receive any rehab money upfront once you've closed on the property?
The first house I flipped, I received 15% of the loan amount right away to get started. That was 15k I used toward paying contractors for demo, architect for his plans, and permits to the city.
Another deal I've done I didn't receive any up front and had to show the work was done before receiving my first payment.
Flipping is a very capital intensive business so having money to start off helps a lot.
-How much of the assignment fee are you able to wrap in?
Some lenders won’t finance the assignment fee if it’s more than a certain percentage or amount. One lender I know caps the assignment fee at 10% of the purchase price while another lender caps it at 20k.
If the fee is more than this amount, which it very well can be, you have to go with another lender or otherwise pay it out of pocket.
-When determining the ARV, is it done in house or by a 3rd party?
You can provide all the comps you want but when you’re not convincing the decision maker it doesn’t matter.
Going back to my first deal, we convinced our lender the ARV on the house could hit 600k. By doing so, we were able to only put 10% down instead of 15%.
If it had been a third party, we would've been at their mercy of the comps they pulled with no way of influencing them.
-How much is the processing fee?
This is a very small fee usually $800-$1000 but something I wasn't aware of until closing on my first loan. Every dollar adds up your initial investment so make sure to keep track of it.
-How do I get refunded for the work I complete and how much is each construction draw?
Once you've completed a certain amount of rehab on the project you'll want to get reimbursed for that amount. If you've done 10k worth of work to your kitchen and flooring how does the lender verify that?
My personal experience has been a third party lender comes out to look at the work being done and signs off on it. I'll then receive the deposit in my account the next day.
It may take 24-48 hours for them to come out in which your subs may want to get paid before then. Make sure to know the turnaround time and stay in constant communication with your subs.
Each draw you receive from your construction total has to costs something. My last project cost $175 every time I had an inspector come out. I ended up having 8 inspections which cost $1400 taken out at closing.
Is it worth it to get an inspection for $2500 worth of work? Keep in mind you could be paying more interest after having been loaned that amount of money.
For payment of the draw, one lender may have $175 taken at the end of the loan while another lender charges you for it right away so it is out of pocket.
-What is the cost for an extension?
Prepare for the worst but expect the best. You can think a property is going to take 6 months going in and could end up taking over a year. That's exactly what happened with one of my projects.
There were issues with contractors getting their work done on time and I had a huge wait with the city getting one of my permits closed. Thankfully my loan term was one year so I didn't have to pay an extension.
If you do come across this situation make sure to ask how much the extension is going to cost. One lender I know charges one point for 3 months or 1.5 for 6 months.
Majority of lenders have been gracious offering a free extension with the stop work order that was in effect for Washington.
Changes post covid
Hard money lenders are taking on new approaches to lending these days requiring more on the front end. The lowest down payment I've been offered since March is 15%. The standard before coronavirus was 10%.
Second, as long as your credit score was above a 620 they'd be able to lend you money. Now some like to see it being above 680.
Lenders may also require 9-12 months of interest only payments shown in your account or even held in escrow.
Construction costs can have a cap on how much they're willing to loan. Two lenders are capping the rehab amount at 70k. Anything above that would have to be out of pocket.
I hope the questions above help you out on your next conversation with a lender. If you have any questions about a particular one or recommendations for who to reach out to, please me know. I'd love to help out.
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