How Do Lenders Get Renovation Numbers
Rental Property Investor · Hampton, VA · Member since 2020 · 12 posts · 4 votes
Hey Guys,
I'm getting into real estate investing by looking into multi-family rental properties. There are some properties I am interested in, but when I have spoken to the bank they are hesitant in those properties due to renovation costs. For example a property in a historic neighborhood which costs $350,000, the bank is worried about a renovation that would potentially cost $100,000. I emailed the banker this evening and they emailed me soon after with that cost estimate. My question is how does the banker know this cost right away? If I bring out a contractor to give me an estimate for the cost of the work, and it turns out to be less than the 100K, would the bank be swayed by this? The real estate agent also had concern about the properties that needed some renovation cost. The topic of FHA loans came up even though we discussed that a conventional loan would be the better route for me. Any help would be appreciated.
Will
Hi @Will Carbonell, welcome to the wild world of real estate investing! Lenders, especially those competent in the area of rehab loans, have a number of resources to determine these ballpark costs like cheatsheats, intuition, and previous contracts or appraisals that they may have done on this property.
That said, here's a very important point that I want to make that I hope you'll take and run with. What the agent and lender are saying is probably not about the property but rather about you, as an inexperienced investor. That's not a knock to you at all, but rather a fact and when a lender or a quality real estate agent is evaluating a deal they are evaluating the deal as a whole, including the dealmaker.
If you're looking at a historic home (Red flag here . .. historic means "lots of things beneath the surface that are likely to be found that are hard to know about until you open up the walls)
Price is $350k and the rehab budget per the bank is $100k . . . $100k in a historic home doesn't go as far as you'd hope. Especially when you find out the sewer line had only been replaced partially, or the knob and tube wiring WASN'T replaced like they said, etc. I would venture to guess that you bringing an estimate from a contractor saying the work will cost less than $100k would have NO impact (at best) and a negative impact (more likely) because, back to the original point: the discomfort may well be with you and your ability to excellently execute this complex deal. If the strategy is to try to tell the bank that it won't cost that much to rehab an old home, then you'll likely confirm what they suspect.
Instead, your best bets are 1.to move forward on a simpler deal or 2. buckle up, hunker down, and do your homework on this property. Get a game plan in place, including what you're doing to the home, who's doing it, what the labor costs and material costs are estimated to be, and why it pencils out. If that's the follow-up conversation you have with the lender then they are more likely to have fewer question marks about the executor and you'll have better odds at doing this deal.
Go out there and get it!