The loan to value (LTV) ratio caps the loan amount. We use 65% of the after repaired value (ARV) on the initial deal and 70% on subsequent deals. This is determined by our appraiser who will walk through the property with you and factor in your repair budget to determine what the property will be worth when your repairs are completed. In addition to the LTV, most lenders have specific areas they are not comfortable lending in. You should discuss this with your lender before you make offers.
Here are a few I see most often. Each of these have the same outcome: cash flow pressure, longer holding times, lower profitability.
- Not doing due diligence on their contractor, resulting in overruns or having to replace the contractor during the project.
- Scope creep. Either the initial budget was not well thought out, or the investor decided to make the project more grand during the rehab process.
- Not budgeting a large enough overrun contingency. If the project is complex or the property has been vacant for a year or more, you should budget at least a 15-20% contingency for unforeseen repairs. Rarely is there ever contingency money left over at the end of the project.
- Being greedy when setting your asking price. The name of the game in this business is speed. Holding costs including taxes, utilities and interest payments on your loan will erode your profits. Normally, it is better to price the property for a quick sale and get paid sooner, than to sit on the property waiting for that one crazy buyer who is willing to overpay for your property. The old adage, you only get one chance to make a good first impression, is also true when listing a property. Your property will get the most attention the first week its listed. Don’t waste the spotlight by over pricing.
If you would like to discuss a project or get pre-qualified for a loan, please give me a call at 412-638-9980 or visit www.hardmoneypgh.com