Advice from a Lender on Refinancing your BRRR Property

[Tamara Deering]

Hello,

Don't shoot the messenger!!!  I want to share some feedback I just received from a major lender regarding a cash out refi of a hard money loan.  

In my day job working for a hard money lender, we issued a loan on a property that the borrower got a great deal on, so good it was very close to a no money out of pocket situation.  Everything went perfect for him, his contractors completed the job on time and under budget, the property is appreciating and he got it for a killer deal.  He decided that based on the price he paid and the location this property might be more profitable as a buy and hold rather than the flip he intended.  I looked at the numbers and looked at the long term hard money loan options available. The refinance looked like a slam dunk but it wasn't.

My lending partner said, sorry the fund managers are still gun shy from 2008, they really, really want the borrower to have some skin in the game in the form of actual cash money that they have put into the deal.  If there isn't cash they will lend on rate and term but only based on purchase price and money that was put into repair the property that is documented with receipts.  They will lend 70% of that amount. I was shocked, this isn't a bank, it is a hard money lender, they are supposed to incentivise under market purchases.  Here is the email he sent me to follow up on our conversation:

"Hi Tamara,

Just to follow up. If a borrower has less than 20% of their own cash into a property (as down payment, and/or rehab costs) then it won’t work for us.

If your guy put about $30k or so of his own money into that deal(down and/or rehab), we can get him cash out in May (6 mo for Hard money long term {borrower took out loan in November, 2019}). It’s the same model for all rehabber’s across the country for us.

If they know they’re keeping a property, it’s a good idea to steer them into putting more equity down, so that most refinances become easier with most lenders."

By the way this lender advertises "no seasoning", I sent it to a second wholesale lender with the same results.

I'm not posting this to deter you from the BRRR strategy, quite the opposite, BRRR is my second or third favorite investment strategy (live in flips and house hacking hold the top spots) but rather a warning to talk to your lender about your ultimate goal and verify your exit strategies before it's too late. Luckily for my borrower he still has 8 months left in his original hard money loan to figure out what to do next, imagine how frightening this would have been if he just started working on this in the last month of his loan.

Good luck and best wishes in your real estate investment adventures.

[Alex Bekeza]

Simply confirming what @Hamid Sedaghat & @Stephanie P. have already touched on. 

I see cash out refinances being done all the time at 90 days of seasoning (cash out) off of up to 75% of the new (higher) appraised value regardless of what the purchase transaction looked like.  I just did a dozen of these for a group of guys who all had 100% financing on the purchase end from private money lenders.  We paid off those notes and the borrowers walked with the rest.  

Granted, @Tamara Deering, borrowers need to find folks like the ones in this thread who understand the BRRRR strategy and have guidelines to work with that compliment it well. 9/10 mortgage brokers are in the dark on this type of thing and are dealing with more conservative guidelines. Like @Stephanie P., there's no reason for lenders to be gun shy when they're writing solid notes back by strong FICO, 3rd party appraisals w/ rent comps, and strong DSCRs.