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“Most investors
don’t use their own
money to finance
both the purchase
and repair costs of
their fix-and-flips.”
Scotsman Guide Residential Edition | ScotsmanGuide.com | December 2017 36
Investor bridge lending is another type of bridge loan that has been in the tool belt of many mortgage brokers and originators for some time. These loans have yielded beneficial and advantageous results for their overall
businesses by opening the door to real estate investors involved in fix-and-flip operations.
Originators armed with bridge loan products
can expect additional revenue outside of the traditional business they are used to. The process
and documentation involved with investors is
less cumbersome, so investor loans close much
faster than the traditional residential loans originators work with.
In addition, originators can close multiple
bridge loans with the same investor client,
whereas in residential lending, homeowners
typically purchase only one home that they keep
for a few years until they buy again or refinance.
Working alongside investors also opens doors
to a multitude of networking possibilities and
chances to connect with other Realtors.
Perhaps you have already received inquiries about bridge lending but didn’t know how
to proceed. Let’s take a look at what you need
to know about the bridge loans that real estate
investors use, so you can become more familiar
with and confident in your ability to work in this
growing market of opportunities.
Nuts and bolts
You’ve likely seen the TV shows portraying flippers who buy distressed properties, rehabilitate
— or rehab — them and, before the 30-minute
show ends, have them ready to sell for a major
profit. What these shows don’t clarify is that
most investors don’t use their own money to
finance both the purchase and repair costs of
their fix-and-flips. Instead, they may use bridge
loans offered by private or hard-money lenders.
Bridge loans are usually structured with a term
of 12 to 24 months, with the expectation of repayment by or before maturity. Most lenders
restrict the property type eligible for these loans
to non-owner-occupied, one- to four-unit residential use, although a few have expanded into
multifamily as well. Best of all, these bridge loans
can be closed within 10 to 14 days if you find the
right lender.
Because of the natural potential risk in these
loans, interest rates are higher than conventional loans and points are charged. Lenders split the
revenue from the points with the brokers who
originate the loans. Even with higher rates, leveraging this funding allows real estate investors
to hold their own capital while they get to the
end-game of profit from the sale.
Loan calculations
Lenders calculate the loan amount based on a
percentage of the total cost of the purchase
price and the budget for the rehab, which produces a loan-to-cost ratio, or LTC. Lenders also
limit the loan-to-value (LTV) amount, which is
based on the “after-repaired” value, or ARV.
Generally, lenders allow up to 75 percent LTV.
The end value in the ratio will be based on an appraisal using the renovation details and budget,
which are provided by the investor. Viability of
the project and the loan approval hinges on an
end value that will cover the loan payoff and provide solid profit.
Take an investor who qualifies for a 90 percent
LTC structure on a $100,000 purchase and a repair budget of $50,000, for example. This investor
will be able to borrow up to $90,000 of the purchase price and $45,000 on the repair budget for
a total loan of $135,000.
If this investor’s rehab will bring the property value up to $200,000, the LTV will be about
63 percent, which would be allowed based on
the 75 percent maximum LTV. In this scenario,
the investor stands to pocket $40,000 or more
for a few month’s investment, depending on
loan and project costs.
Experience matters
Lender guidelines vary, but most lenders
approve the LTC and LTV based, in part, on the
previous experience of the borrower. Because
of potential complications in the construction
process and the need for an understanding
of the market, experience is a big factor that
determines the percentage of the borrower’s
contribution. Personal credit, liquidity level and
claimed income also can be factors.
Some more established lenders provide online
application technology that will give immediate
quotes based on the borrower and the deal. This
can be helpful to originators because of the different factors that work together to determine
the terms of approval. In this lending space,
FinTech, or financial technology, is becoming increasingly important for efficiency and accuracy,
because it removes much of the guesswork in
the process so there are fewer surprises.
Related Articles
For more articles on bridge loans
“Hard Money Opens Doors to New Clients,” Ian Walsh, January 2017
“Satisfying the Need for Speed,” Jan Brzeski, October 2016
“Regulations Bring Change to Hard Money Deals,” Yanni Raz, January 2016
View these articles and more at ScotsmanGuide.com.
