Key Investment Numbers
Numbers that Private Lender Consider
Today we will be covering what numbers are the most important numbers (as a percentage) a lender is looking at for their loans. As a real estate investor, it is critical that you understand what your lender (Private or Hard Money) will be looking at and considering for your loan. This is not a comprehensive article on ALL the numbers, simply the Loan-to-Value “LTV” percentages commonly used in the industry. Also, as a disclosure, the percentages and the numbers discussed in this video will more than likely change as the lending environment changes. Best practices are to have this discussion with your Lender to find out what they require. After you watch the video there will be some discussion below covering a little bit more these percentages and how you should approach your Florida real estate investment deals with this knowledge.
Loan To Value
So real briefly let’s cover some of the important key percentages that a lender will look at and why you, as a real estate investor should know this is what the lender is looking at and why the lender is looking at this.
LTV = Loan-To-Value also known as the “As-Is” Loan-To-Value. The LTV is most likely used by the lender to describe what you are purchasing the property for and what they will give you as a loan against that as a percentage.
PLTV = Purchase-Loan-To-Value is what most lenders actually mean when they say LTV. Though not always, so but sure to ask your lender, when you offer a loan on the purchase of an asset if their LTV lending is based on the As-Is value or the agreed-upon purchase price between you and the seller?
Loan To After Repair Value
The next value I discussed was the LTARV, Loan-To-After-Repair-Value, also referred to as the ARV or After Repair Value. The ARV is the actual value of the real estate once the repairs/ improvements are complete. Many investors will say ARV thinking it is the loan amount, but technically it means the actual future value. A Private Lender or a Hard Money Lender may tell an investor that there may ARV is X% but what they are actually saying is the Maximum Loan to After Repair Value is X%. Always find out if your lender will fund the purchase and the construction costs. This will allow you to make your available capital go further.
Combined Loan To Value
The combined Loan to Value is a combination of all liens against a property. In most cases Private and Hard Money Lenders will include the purchase / refinance loan together with the construction costs as one lien. But some may split those two categorized monies into two different loans. Whatever the case the CLTV is important especially if you’re getting a purchase loan from one lender and a construction loan for a different lender. The 1st position lender may have stipulations as to what the CLTV they will allow on the property for the duration of their loan. Be sure to ask your lender what their CLTV requirements are if you plan on getting multiple lenders for a project.
Loan To Costs
The Loan To Costs scenario can be confusing, and in most cases, for SFR investment properties, this will not be a consideration if the real estate investor is using a private lender like Blue Bay Capital. However, if the investor is using a hard money lender, then the Loan to Costs may be a consideration for the project, and the way the lender structures their LTC must be understood by the investor. The worst-case scenario is for the investor to mis-understand how the lender calculates LTC, get a property under contract, and then realize the LTC does not allow the lender to loan up to the amount that the investor thought they could get.
That wraps up this article covering key lender percentages. I hope this has helped you, the real estate investor better understand how a Lender looks at the numbers of a deal, your investment deal, and gives you some insight on how to better structure your deal to make it appealing to a private lender or a hard money lender. At the end of the day, it’s all about getting your deal funded and leveraging someone else’s capital to help build your real estate investment portfolio! If Blue Bay Capital can ever be of assistance I would very much appreciate being able to speak with you one-on-one over a phone call or even in person.
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Transcript
Today we will be talking about key Fix and Flip numbers Real Estate Investors need. My name is Edwin Epperson. I am with Blue Bay Capital and today we are helping Real Estate Investors like yourself, make wiser more informed decisions. You can follow us on Facebook @bluebaycapitalfl as well link up with me on LinkedIn @edwineppersoniii and of course, can find us on our website www.bbcfunding.com. Let’s jump right into the topics of conversation for today. We're going to be discussing LTV, PLTV, LTARV, and LTC. So these are some of the more important percentages that lenders look at when deciding whether they're going to offer a real estate investor, like yourself, a loan. The purpose of today's conversation is to pull back the layers if you will or the mystery behind these percentages, so that u as a real estate investor, know how to structure your loan request so that they are approved by your lender. Let's go ahead and set the stage. Our subject and example to be used in this presentation will be 1234 Main Street. This property, as it sits today is $125,000. We know that the lingo in the industry is, “As-Is” Value. The “As-Is” value simply states or simply means that the property in its current condition today is worth x amount. So in our case 1234 Main Street, as it stands today, is worth $125,000. Let's jump right into the LTV. This simply means loan-to-value and it is the comparison as a percentage between the requested loan to the as-is value, meaning today's value. Now the LTV can also be synonymous with “As-Is” LTV. Either way, both of those loan-to-value numbers are talking about the same thing, the as-is value. Now that you know, what does this look like in practice? So we've got our property, it's under contract. You've got it under contract for $100,000. So that's what your purchase price is. You get a loan from your lender. That loan is for $87,500. What is your LTV? Well, you take the loan amount divided into your as-is value and that will give you your LTV, which is 70%. So $87,500 is a 70% LTV loan. Now some of you are saying, “Well I've gotten LTV percentages before but that doesn't seem right, that's not the percentages that I'm seeing from my lender.” Well, that's because LTV is the lingo that is most commonly used on the real estate investor side, however, on the lending side, there is a different percentage we look at. That is called the PLTV. So all that means is, that it's the purchase loan-to-value and this is the comparison as a percentage between the requested loan to the purchase price, not the as-is value. What does that look like in practice? Well here is our property, as you know, 1234 Main Street. Here are the numbers that were already aware of. We're going to go ahead and get a loan. A purchase loan is given for $70,000. What is your PLTV? Well, your PLTV you take the loan amount divided into your purchase price, not the as-is. Guess what, we know that is also 70%. Here are some critical thoughts that you will want to consider. All right, when you're discussing with your lender what they will loan on, be sure to ask if they're loaning based on the As-Is LTV or PLTV. That's really critical because remember, you don't want to be thinking in your head, because of all of their marketing material or what you've heard as you talk with your broker or loan originator, or the private lender and they're telling you, that yeah 70% LTV. You go in to make your offer, you get the property under contract, you put your earnest money deposit down and you go back to the Lander. And the lender says, “Oh, well yeah, this is the deal, well do a 70% LTV, and then they give you the amount that you have to bring to the table and it's drastically different. What does that look like in practice? So remember the PLTV is the lender will determine how much down payment you have to bring and not as a percentage. Let's look at this. A 70% PLTV compared to a 70% LTV. Guess what the percentages are? Still, the same. You have to bring 30% to the table, but what does that 30% look like? On the purchase loan-to-value, remember your purchase is $100,000, and your down payment on that LTV is only $30,000. However, if the LTV, the loan-to-value, is simply based on the As-Is LTV, your down payment is only $12,500. It's still 70% loan-to-value and you are still, as a borrower, a real estate investor, having to bring 30% to the table. However, that 30% is drastically different. Matter of fact, it more than doubles in some cases. Just be aware that is really important that you understand exactly what the lender is looking at when it comes to what you have to bring to the table. Okay also knowing what your lender will require, will prevent renegotiations. Which I know all Real Estate Investors hate to do, go back and renegotiate, especially if there's a wholesaler involved. Everyone hates delays and closing delays because your name and your reputation are on the line. You do not want to be in a position where your reputation starts to get tarnished among your other colleagues in the real estate investment space. More than likely this will cause frustration between you and your lender with the misunderstood capital requirements. These are great conversations to have with your lender. Well, that's fine and dandy, but everybody, not everybody, but there's a very large percentage of Real Estate Investors, that are always looking to do The Fix and Flip. What do those numbers look like? Well, this value is called the LTARV or the loan to after repair value. It is the comparison, as a percentage between the requested loan, compared to the future value or the after repair value, which is a dollar amount. This is seen as the ARV. The after repair value is a dollar amount, the loan to ARV would be the loan based on that dollar amount. Let's take our example. We know that the future repair value is $200,000. Let's take a look at what that looks like in practice. You get a loan from your lender. The new loan is $87,500. Now we know, based on the examples, that we've been using, that you're getting a loan based on the as-is value. With that number, this was based on your purchase price of $100K, the loan would actually be a lot less right, before the as-is value? That loan, or that percentage, the LTARV would be your loan, dollar amount, and divide it into your ARV dollar amount, and that would give your new LTARV, a 43.75%. That's a really good LTARV and I do not know if too many lenders that would pass that up as long as the renovation cost was not astronomical for instance if your renovation cost was $100,000 that loan probably wouldn't make any sense. I, however, being within reason, that would be a great loan to make. Here are some critical thoughts. When considering your LTARV, when discussing with your lender the LTARV, also ask if they will fund all or part of the construction costs. What we're going to get into next with what that looks like.I would have to say that in most cases when you were discussing with your lender what they're talking about the LTARV, more than likely, they are also discussing the cost of construction. Most of the time they will say, “Well our LTARV or ARV is up to 70% maximum or 65% maximum, whatever that looks like. More than likely they are also including the cost of the construction. But that is definitely a question you want to ask them. Then you're going to also ask if there are exceptions to the maximum LTARV. For instance, wood frame compared to cinder block? Here in Florida, especially in Tampa Florida, and a lot of really old cities like Saint Augustine, Tallahassee, and Pensacola a lot of these cities have been around for well over a century. You've got homes that were built from 1900s to the 1935 - 1940s. Most of them are built as wood-frame homes. Because they're so old they carry a lot of additional risks and some lenders will have exceptions to the maximum LTARVs if the home is of a different construction type. Maybe it's in a flood zone, which is unfortunately very common here in Florida, or some other things like that. Just be sure to ask your lender if there are exceptions to the maximum loan to value. The all-important LTV, or the loan percentage you probably won't hear this talked about that much. It's because this is the underlying CLTARV. When most Real Estate Investors like yourself or talking to a lender, you're wanting to know what are you, what will you lend on ARV, and will the underlying metric or the underlying formula is to determine whether, is this formula right here. It is the Combined Loan To Value. It is the comparison as a percentage between the total loan amount and the combined loan to after repair value, but that's a really long acronym and we try to keep things simple. When you, if you, hear a lender talking about CLTV just know that they're talking about the total combined loan value compared to the ARV. A question to ask if you are talking to your lender is, “Hey your CLTV, is it based on the as-is value or the after repair value?” If you want to have your renovation costs included in your loan, just be aware that that could be a great question to ask your lender, is to see their LTV based on after repair value or based on as-is value. What does this look like in practice? Again, we’ve got 1234 Main Street, we have our ARV of $200,000. We have got a construction cost of $50,000 and so the loan is given. We know that we've got a loan for, as you know, $87,500. What is your CLTV? Well, you take your combined loan-to-value that's the $87,500 plus your $50,000 and divide into your ARV, the $200K. That's what that formula looks like. This is a 68.75% CLTV also translated again as your LTARV. Some lenders were going to 60% after repair value, some will go to 65% after repair value, and some lenders will go to 70% after repair value. In many cases, if the CLTV is above the loan maximum amount, in many cases not always, but it will require you to bring more money on the down payment they're not going to decrease the amount of funding on the rehab, at least a smart lender won't. The reason why is they want to make sure that they're protected going right out the gate and not based on a potential future value that quite honestly fluctuates because you don't know where the market's going to be in 6 months, 9 months, a year or longer. That is a quick way to understand the CLTV and this metric drives a lender's ARV loan capabilities. Here are some critical thoughts. You're going to want to ask your lender if they are lending on rehab funding, how will they disperse their draws? Is it table funded or in arrears? This is very significant. I cannot tell you how many Real Estate Investors have gotten frustrated and come and spoken with us about their experience with their previous lender. They were expecting, you know when you close on the loan, and let's say the project, in this case, was a $50,000 project, they were expecting a check at closing for $12,500 to start the work. Because your general contractor said, “I need $12,500 to start the work.” or maybe more and then the lender said, “No, that's that's not going to happen.” That's because the lender funds in arrears, meaning that as a new investor, you have to put that money to work first, and then you get reimbursed. That's a different conversation for a different date, but just know that you will want to know if your lender disperses construction funding at the closing table or in arrears. Also be honest, and be sure to understand what the lenders requirements are to fund construction. It's not simply a matter of, in this case $50,000, then you say, “Hey I need money for my project.” and for a lender to write you a check. More than likely the lender, especially if they have systems and processes in place, is being very protective of their money, or their investor's money. They're going to have risk mitigation measures in place, such as feasibility studies, draw schedules, draw inspections. All of these are in place, and you'll want to know, as a real estate investor, what the requirements are from your lender. The LTC. Now for those that are in the residential space, this is more often than not a percentage really reserved for the commercial space. We're going to dive into it today using our example. If you have a real estate investor or a lender that is going to loan you the money and they start to talk, start discussing the LTCm this will allow you to understand more what they mean. There are a lot of questions you need to ask him. We are going to dive into that because this is, quite frankly a very pliable metric. It can change based on the lender and their interpretation of the total loan to costs are. Okay, what is their definition of the loan to cost, right? All right, so let's just go ahead and use our example again. We've got 1234 Main Street. We know that we have $50,000 in construction costs and our project financed the construction cost equals your LTC. Now in this case, if you were going to get a $50,000 loan or you are going to have included in your loan the construction, thist is a 100% LTC loan. Now this is very simple and there are a lot of variations. Again this is not industry-wide. Almost every single lender that I know of has a different way to measure the LTC. Some lenders, specifically in the residential space, if you're dealing with a private lender, LTC may not ever even come out of their mouth. Again this is really reserved, when you're going to see this a lot more, when you're talking about commercial projects or the asset is a commercial asset. This is important to know and I want to give you some questions that you can ask your lender if they mention LTC, okay what are you really talking about. You want to make sure that you ask how do they calculate their LTC. Are they including the total cost of the project or are they only including the construction cost financed? The construction cost, for example, you know in our previous example, we had the $50,000 loan. If their LTC is just based on the amount of the loan that is financed pertaining to your construction, and you get $40,000 for the construction, and that's all they're measuring the LTC well then that's an 80% LTC right? But there's other ways to look at or calculate your LTC. Here we go, the cost of the loan, you're 6 months holding cost, construction cost, so the total loan amount. Now, this does not include the purchase price. But that could actually be part of how they calculate the total cost, they could actually calculate the purchase price. Again this is something that you want to discuss with your lender. We know,let's go ahead and assume, that the cost of the loan, to get this loan, this $137,500, the cost of the loan will be $4,125 the six months of holding costs will be $8,250 and then your total cost would be $62,375. What does the LTC look like? Well this is why it's very important to ask your lender how they are calculating this. If the LTC is based on the total then you get 100% LTC, if it's based on the total then you get $62,375 plus your purchase price. Well that's a pretty, well that's almost, that's literally depending on your down payment, that could be pretty close to a hundred percent financed loan, right? If the LTC, if your lender is basing it only on construction, then guess what? Your loan for the construction would only be $50,000. I want to point this out, that the first example is rarely if ever seen in the industry. We have a program at Blue Bay Capital where that is potential, but it is only offered to our Elite Platinum members. That is not something that is advertised or even discussed on the first couple of deals. Just know that for the industry, they will never include the holding cost, the costs to cost, and the construction cost all into that LTC. If the LTC is based on a total, that would be $49,400 and 80% based on the construction only within only be $40,000. The LTC based on the total cost is a very pliable number. Even though it says $49,900 you're looking at that saying, “Oh, well that's great, you know I get, I only have to pay $100 of the total construction and I'll get the other hundred finance?” It really depends on how the lender is going to disperse construction funding. They may actually say, “Well you're going to have to put 20% down” or “You going to come to the table of 20% of the loan cost.” You have got to come to the table with at least 20% of the six-month holding cost, and 20% of the construction cost. Again this is a very pliable number and it varies for each lender. Be sure to ask your questions, be sure to understand how they are calculating LTC if they bring it up. Again if your lender does not bring up LTC I would not even bother with that because they're more than likely simply looking at the LTARV and the purchase loan to value or as is loan-to-value. These are the key Fix and Flip numbers that Real Estate Investors need. This has been Edwin Epperson with Blue Bay Capital, thank you so much for joining me today. God bless and make it a great rest of your week.