What ratios to look at for loaning private money? LTV, LTC?

Question

I'm wanting to get into PML. I understand the after repair LTV should be no more than 65-70%. But I'm more confused on the LTV prior to rehab. Let's say a property cost $300K and needs $150K for rehab so total cost $450K. I saw another post where someone recommended to cap the LTC at 88%. So $396K, leaving the borrower to bring $54K into the deal. But the problem there is what happens if the borrower immediately runs off with the money? The $300K went to the seller and now the borrower has $96K in his pocket. If I foreclose on the home I'm still going to be out quite a bit of money. So I think I'm missing something here.

Is it the case that rehab costs are only given as reimbursements as opposed to upfront? So loan 88% of $300K, which would be $264K, borrower puts up $36K as a down payment, then self funds the $150K rehab and I reimburse after he pays for the rehab? Is that how it works? If so, at what point exactly would I be reimbursing the borrower? And if they have the money to pay for the rehab upfront, why do they need to borrow money from me for the rehab?

Robin Simon · Answer

Yes, you are on the right track - you want to do a disbursement "draw" process - where the funds are typically released in installments, and based on verified completed steps of the renovation

Erik Estrada · Answer

That's correct. Many lenders do not fund the rehab upfront for this very reason. Also, hard money lenders run the risk of the borrower not completing the project and foreclosing on a mid construction project. This is why experience is very important

Jacob Sherman · Answer

Hey Dewayne ! My name is Jacob with Lendbright and would love to answer any questions for you that you may have in the analysis of your project . When is a good time for us to connect and discuss ?

Dewayne Perry · Answer

Thanks Erick and Jeff, that answers my question perfectly!

Jeff S. · Answer

You would never provide the entire $150k rehab costs upfront to the borrower, @Dewayne Perry.  If the borrower paid $300k for the property and needs $150k for the rehab, using your 88% LTC ratio, you would lend the $264k toward the purchase and the borrower would bring the remaining $36k plus closing costs. They would additionally be required to self-fund the initial rehab costs.

In this case, you would set up a draw schedule defining the various phases of the rehab, perhaps in 5 increments.  They don’t have to be equal but assuming they were, once the first $30k in costs were paid by the borrower, and you verified these costs and their completion (or hired a company to do so), you would reimburse the $30k.  The borrower would then use this money for the next step, again subject to your reimbursement when verified and complete, and so on.

In this case, the borrower would need the initial $36k plus closing costs plus the $30k that would go toward construction plus some amount for contingency.  As construction progressed, your loan balance would approach $414k ($264k + $150k) but the house value would approach the ARV, always keeping you safe.

As an aside, we would not fund this deal unless the ARV was $450k/75% or $600k.  Here, we could show the borrower would earn around $65k or 11% of the ARV, which we would consider a fair profit at this price point.

What ratios to look at for loaning private money? LTV, LTC?

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