Investor · Duarte, CA · Member since 2020 · 48 posts · 37 votes
Hello BP! I need some clarification. So let's say I get prequalified from a bank for 100k for example. So I buy a property and use the BRRRR strategy,I'm all in for 80k and the ARV comes out to 130k. When it comes to refinance at let's say 70 percent of ARV, that would come out to 91k. So my two questions are:
1) What's the relation between the amount I'm prequalified for and the ARV? Does it matter if the ARV is more than you're prequalified for?
2) If I'm reading this right, this means I'm pocketing 11k correct?
I know these are dumb questions, but would appreciate any clarification. Thank you
@Ignacio Linares the ARV can be higher than $142k, but you just may not be able to get a loan for more than $100k. The banks generally prefer a lower LTV so they would be happy. I saw someone give you a breakdown of the max offer assuming a $50k rehab, but as they mentioned you still need to factor in closing costs, taxes, and holding expenses (taxes, utilities, interest on private or hard money, etc).
@Ignacio Linares prequalification is like a guide to how large of a loan you might be able to get. It's not a guarantee, and it's also not a hard and fast limit.
1) The ARV as determined by the bank - not your analysis - is what will determine the max the bank will lend to you. Let's assume 70% is what they're willing to lend, so on a $130k appraisal, they'd lend $91k. ALSO, whatever you qualify for is the max they'll lend to you. In this case, assuming you not only prequalify but actually qualify for $100k, they'll give you the lower of either of these maxes.
The amount your prequalified for is how much you can borrow (although banks will sometimes go above that, but you have to talk to them about that). So if you are getting a 70% LTV loan, then you can borrow up to 70% of the ARV OR the maximum you are qualified to borrow, whichever is lower. In this case, if you're prequalified to borrow $100K and 70% of the ARV is $91K, you can borrow $91,000.
And yes, you would get $11,000 back (minus loan and title costs of course) assuming the bank is willing to do a cash out refinance which, most banks are these days but you will want to verify that.
@Simcha Davidman ahh okay thank you for clearing that up! So in this scenario, if 70 percent of the ARV happened to be higher than what I prequalifed for, I assume I have to front the difference correct?
@Andrew Syrios Working backwards, if I only qualify for 100k, that means my ARV has to be 142k. In this case if I'm looking at 40-50k rehab, what does my purchase price have to be?
@Ignacio Linares yes, you need to buy the property before you can "refinance" it. You can buy properties at 70% ltv or higher, but that's a different strategy - not right or wrong, just different. It's more conventional. You're prequalified for 100k (make sure you understand if that's $100k of loan or purchase price (with the loan being 70% of that)). So you go find a property that you like and fits your criteria, including price, and make an offer. With your offer, you give the agent your prequalification letter, showing that you're capable of actually purchasing it.
Chances are you won't get the property :) This is a seller's market. You need to be prepared to move very quickly. That's on making offers, as well as shortening your due diligence and closing times as much as possible. So while you might be 99.9999% confident that you can close on the property getting a mortgage in 30 days (which nowadays will be closer to 45 because of bank and appraiser backlog), some other guy comes in and says, I'm closing all cash and I can do it in 2 weeks. If it's the same price, which is the seller going to choose?
That buyer (which is what I thought you were talking about in your original post) will close on the deal, do the rehab, and then go refi with a bank and get his money back. So in other words, he's putting up $60k + $20k rehab (making up numbers to try to match what you wrote originally), and he's confident based on the comps in the area that he can get an appraisal for $130k. If he's right, he's likely to get a bank loan for at least 70%, or $91k - be able to pay himself (or whatever alternative funding source he used), keep the property, and then redeploy his funds all over again. Hopefully he won't be your competition on your next offer too!
But the short answer is - yes, you need to purchase the property with alternative funds before refinancing at the higher valuation. As mentioned, depending on the house, you may be able to buy it with a regular loan, too, and then refinance that loan after you do the work. But if it needs $50k of work, you probably won't be able to get a loan on the initial purchase.
There's a general rule of thumb out there that your all in costs should be 70% of the ARV. (It happens to be that the 70% of ARV is the same as the LTV in your case - these numbers are not really connected.) So if you are looking for a property on which you can take out a $100k loan and therefore need an appraisal of $142k. If you're looking at a $50k rehab, then you can only buy the property for $50k - 50+50=100. But bear in mind that this does not include closing costs, holding costs, or any sort of contingency buffer.
@Ignacio Linares the ARV can be higher than $142k, but you just may not be able to get a loan for more than $100k. The banks generally prefer a lower LTV so they would be happy. I saw someone give you a breakdown of the max offer assuming a $50k rehab, but as they mentioned you still need to factor in closing costs, taxes, and holding expenses (taxes, utilities, interest on private or hard money, etc).
@Andrew Syrios Working backwards, if I only qualify for 100k, that means my ARV has to be 142k. In this case if I'm looking at 40-50k rehab, what does my purchase price have to be?
The ARV would have to be $133,333 to pull out the full $100K:
$100,000 / 0.75 = $133,333
But that would just be to pull out the full amount you are prequalified for.
@Simcha Davidman I completely agree, it's a sellers market and deals are flying fast off the shelf! A more experienced investor can quickly analyze a deal to see if it'll be worth it and then pull the trigger, unfortunately I am not an experienced investor, so the analysis part and securing financing is still a bit hard for me. Any tips on how to get a HML to fund a deal for an out of state newbie?
Also any tips on getting accurate comps and how to get as close and accurate for ARV? I hear soo many stories in regards to the BRRRR method where the appraisal didn't come out as intended.
For holding costs that includes interest payments for the HML and the loss of rental income dude to rehab correct? Are there any other holding costs?
Thank you soo much for your detailed response! I know I am asking alot of questions, but the unknown is giving me anxiety seeing as how I'm looking to do my first BRRRR from out of state!
@Ignacio Linares if your appraised value is way higher than your qualified loan amount, you might be able to get a better rate or some other term more favorable, since the LTV on the loan will be low - since it's capped at the amount of money they will lend you.
Regarding your other questions - it is tough! The first deal is really freakin hard for some people (myself included); other people seem to just pull the trigger with confidence and everything works out (or it doesn't and they figure it out as they go). So don't be discouraged. Keep analyzing and keep making offers with what you can handle. Little by little, without you realizing it, you will become really good at what you're doing. And one day, whether that's 2 months from now or 8 months from now (depending on how much time and effort you really put into this), you will realize that you've gotten really good and confident with what you're doing.
As far as getting HML for a first loan, this too will be hard. Unless it's a killer deal, HMLs won't want to deal with you. Unless you borrow from those HMLs who lend with one of the goals of taking over the property (as opposed to taking over being more of a contingency). Partnering with someone more experienced can help. Or working your network of family and friends and trying to put together soft commitments of "private money" - which generally has better terms for you than HML.
I do not play in this space, so I can't tell you confidently how to assess ARVs and comps. You need to really know the submarkets and neighborhoods on a granular level, even if you're investing at a distance. One block the wrong way and you can throw out your whole execution. Talk to local realtors/agents about markets, about houses they have or others that are listed. Some of them are not good, and some of them won't want to deal with a newbie who may or may not be serious. But talk to enough of them and you will find some great ones with the patience to deal with someone starting out and growing.