Workarounds and Exceptions When Working With a Lender Think real estate
Part 2: outlining some options to keep in mind
When applying for a loan in the hope of securing a real estate investment property, there are always lender guidelines to keep in mind. These guidelines are crucial because they allow lenders to set a baseline of expectations that borrowers must meet when starting the application process.
However, it can often be a good idea to ask if a lender is able to offer or willing to discuss exceptions or workarounds for certain scenarios. If the lender goes the extra mile and wants to find ways to try and do business with an investor, this is a good sign that you are talking to the right investor.
Here is the second installment of workarounds and exceptions to keep in mind that RCN Capital offers and those that another lender may also offer.
Initial advance less than minimum requirement for patches and rollovers
This exception is crucial for investors to know if the property value is equal to or slightly greater than $ 50,000 for properties of 1 to 2 units, as there may be an issue with the initial advance on a purchase of less than $ 50,000. the minimum requirement of $ 50,000 for the program. This is an area where we are still able to lend on the property, but RCN would require full interest in the boat.
At RCN Capital, the only difference to full boat interest would be that we charge interest on the full loan amount, both the initial advance and the renovation funds held in escrow. In addition, there would also be a two percent increase in the interest rate on the loan. In a normal loan scenario, interest is only charged on the unpaid funds, not the renovation holdback.
If the investor has confidence in the property in which they want to invest and that increasing interest rates is something for them, then this exception could be very useful for investors. If this exception strategy is used in the fix-and-flip loan program, the increase in the interest rate is not as severe if an investor can perform the flip in 4-6 months, as he There is no prepayment penalty on this specific loan program at RCN. Capital city.
Letter of explanation (LOX)
When it comes to asking your lender for an exception or workaround, a Letter of Explanation (LOX) can be of great help. Prepare and submit a letter of explanation for any non-standard transaction when submitting the required documents. Lenders are likely to apply for one when there are extremely large deposits, exceptions previously allowed on outstanding loans, or unusual background check indicators. Letters of explanation are always a plus to submit for a significantly reduced purchase price as well.
This can also be used for properties where the purchase price is below our minimum property value requirements, but the as-is value exceeds our minimum requirements. This is more common with auction purchases or foreclosure properties, but a letter of explanation shows a lender’s initiative and providing basic information makes the lender’s life much easier. Once they see an investor submitting a LOX consistently, they are more likely to work with them and go the extra mile to make an exception for the investor.
Also, as a reminder, an explanatory letter (LOX) does not need to be an official document. Just type an explanation using Word or a similar program and submit it along with your other documents.
Is the property suitable for the neighborhood? (White elephants and unicorns)
This workaround is more of a smart practice that borrowers should use in a number of different scenarios. Whether it is a purchase and rehabilitation, the purchase of a potential rental or the start of a construction project, the integration of a property with the rest of the district is the recipe of the success. Properties that don’t match their respective neighborhood can be referred to as “white elephants” or “unicorns” and that’s something you want to avoid in the real estate investment space.
Sometimes renovation plans can be very ambitious to create the best, most modern property that meets the investor’s standards. However, if the rehabilitation plans produce a property that ends up being much more valued than its surrounding neighbors, the shiny new renovations can make the property junk instead. Even though this is a beautiful property, if it stands out too much in appearance and especially in price, you can expect the property to stay on the market longer and the price will eventually need to be lowered. In this scenario, the investor is at risk of losing money because after all this work, he will not get the expected purchase price due to the difference between the properties and those in the surrounding area.
Having an existing appraisal is an exception RCN Capital and other lenders can make, and if accepted by your lender, this exception is a great way to save time and money. At RCN Capital, if the valuation is completed 120 days before the closing date, then RCN can accept the valuation.
It must be a third-party review and come from a verified source that RCN can trust, but we will review it and hopefully be able to accept it.
Ordering another assessment can take 2 to 4 weeks and costs an average of $ 500 to $ 1,500 more. If you have an assessment already completed, please send it.
Even though we can’t use it, it wouldn’t hurt to have multiple appraisals of the property.
Exceptions and workarounds are crucial to knowing the real estate investing industry. Asking your lender about them and learning more about what some lenders can offer is a huge benefit to investors. With Part 1 and Part 2 of the workarounds and exceptions now available, you should know how to get the slightest edge to make a deal work.
Nate Zielinski, Junior Business Development Coordinator, joined RCN Capital in 2020. He adds his ambition, communication skills, teamwork and public speaking ability to the business development team at RCN. Nate’s goal will be to recruit new, lasting business relationships with brokers and borrowers as well as maintain the strong relationships RCN Capital already has in place. Nate’s previous work experience includes sales, advertising, writing, and social media. Nate graduated from the University of Connecticut in 2015 with a journalism degree.