Rehab Costs and Holdback

[Pat Arneson]

If I intend to fund the rehab with my own cash, do I need to disclose my rehab budget? I’m seeing lenders holdback this amount. It’s showing as increasing the loan amount although monthly interest payment stays the same? 

[Nick Belsky]

@Pat Arneson

This is very specific to each lender.  If you are purchasing with hard money, the plan to refinance or sell in the next 12 months or so, most will not require you to show your rehab budget.  They will inquire about your exit plan.  The ones that do ask you for a budget will scrutinize your planning and make sure they agree with your numbers prior to issuing a loan approval.   If purchasing with a perm loan, then you need not do anything.

Now, if you plan to finance the rehab, yes, you will need to show your budget with scope of work.  The total loan amount will increase.  For non-Dutch interest products, the loan payment is based on the principal amount of the loan each month.  If your purchase loan is $100,000 and you have $25,000 in rehab holdback, you are only paying interest on the amount of the principal balance each month.  As you draw from the holdback, the principal amount increases and thus, so does your payment.

For a Dutch interest loan, your monthly payment is based on the full loan amount as if it were fully drawn.  So for the example above, the payment would remain the same until maturity but you'd also be paying interest on funds that you haven't used yet.  Pros and cons for each type, and each type has their scenarios where one is better than the other.  

Hope that helps.

Cheers!

[Annie Seurer]

I believe most will want to see your SOW to ensure it's in-line with the ARV. If your timeline is relatively short, it may make sense to just have the lender fund the rehab (typically means better rates, too) There are a lot of different scenarios. Feel free to reach out!

[Peter Mckernan]

Quote from @Pat Arneson:

If I intend to fund the rehab with my own cash, do I need to disclose my rehab budget? I’m seeing lenders holdback this amount. It’s showing as increasing the loan amount although monthly interest payment stays the same? 

Typically yes, they want to know how much you will be spending and if you are making a profit.. If you do not get a profit in your numbers they may not lend to you.. There is a seller right now that I have submitted an offer for a client, and the HML is foreclosing on the seller since they are up at their timeframe and they have to sell below the profit line for the seller and also below how much she spent on the rehab.. The seller is losing money in that case, and the HML always makes sure that there are margins in there for HML first then the investor.