100% Financing For Non-owner Occupied or Commercial Real Estate Property is a Myth
Everyday, I receive many calls about 100% financing on non-owner occupied properties, usually from eager hopefuls who just attended a seminar somewhere and were told they could make money flipping properties with no money down. So I decided to write an article about it to help shed some light. I would like to hear your thoughts and answer your questions to help you structure your deals.
Having rehabbed and flipped over 50 properties in the last 8 years as a licensed contractor and 24 years of retail and commercial real estate lending under my belt, I feel it appropriate to share with you a few things I have learned about this business.
My name is Travis Williams and I own Western Capital LLC, a broker, specialized in finding hard money lenders for borrowers in need of financing for their non-owner occupied or commercial real estate pursuits. There are several misconceptions we see from borrowers who send their applications to us. The most egregious is the idea that a borrower/ investor can purchase, rehab and flip or keep as a rental property without any investment of their own money.
True, an individual or entity could convince another to fund their project, however, our portfolio of lenders will not engage when there is no borrower “skin” in the game. We work with about 25 of them. Typically, the highest loan amount we see is up to 90% of the purchase price plus repair cost for a rehab project and up to 80% of the purchase price on a turnkey rental.
These 2 types of loans do not overlap – rehab versus rental. Hard money lenders are interested in the after repair value (ARV) of the subject property and as such, are willing to lend more on a rehab project with the hopes of the property gaining value in time, consequently improving their position on the asset. They tend to cap at 80% for rental purchases or refinances, because the risk of slower appreciation is higher.
Some lenders do advertise 100% financing, specifically in Delaware, Florida, Georgia, Maryland, Minnesota, New Jersey, Virginia, Washington DC and Wisconsin. We do not know why this option is only available for these states – could be something to do with foreclosure laws, redemption periods, or higher rate of property appreciation.
What we know, firstly, is that we do submit applications to these lenders and very few of them actually close. What inevitably happens is about 2-5% of the loan amount is incurred by the borrower anyway, including but not limited to title costs, points, exit fees, upfront fees, prepay penalties or appraisals which can run upwards of $2500 for residential to $10,000 or even $30,000 for commercial properties. Seller and some lender financing could cover part of this – the rest unfortunately will be out of pocket, depending on how risky the transaction is.
Secondly, rehab loans are reimbursed. The borrower covers the initial cost of the project. Once enough of the rehab is complete, the lender will send a representative to inspect before a check is sent to reimburse the borrower.
Thirdly, most lenders want to make sure that the loan is not a bail out, so they ask to see 3-6 months’ worth of monthly payments in reserves to cover rental vacancies, or unforeseen repairs that inevitably manifest as the work progresses.
So, does 100% financing for non-owner occupied or commercial property really exist?
I think not – If you are short of funds at the beginning of your project, the situation will not improve as you get deeper into your rehab – I think that not having any money in your back pocket and relying on others to cover incidentals, is a dangerous place to be.