What do you mean by "back-end LTV"?

By back-end LTV, I mean the LTV at the completion of the project. For example: let's say a borrower needs $100,000 for the acquisition of a property and $20,000 for construction funds and thus wishes to borrow $120,000. If the completion value of the property is conservatively figured at $170,000 based on comps provided by the borrower, the back-end LTV will be 120/170 or 71%.

Okay, so then what is "front-end" LTV?

Front-end LTV is the LTV immediately upon the closing of escrow but prior to any construction. In the example above, it is a little tricky to talk about the current value of the property since it is a fixer (and fixers are tough to comp directly), but if we determine that the AS IS value of the property is $125,000 then the front-end LTV is 100/125 or 80%. Generally with rehab projects, if the back-end LTV is in-line then the front-end LTV will be in-line also. This is because with rehab projects, the profit is made in the buy, not in the construction.

Do you require an appraisal?

For rehab projects we ask for an appraisal...we move fast. We know that professional investors must move quickly and that they are frequently the best source for data regarding the projected value of their project. If an investor tells me that he expects to sell a property for $200,000 upon completion, I say, "Show me how you have come to this conclusion." A good set of comps is generally all we need.

Are you able to loan 100% of hard costs?

Yes, in some cases up to 100% of purcahse price.

How does the construction money get disbursed?

Generally through an escrow account if needed. Each deal is structured differently.

How much experience do you require from the borrower?

Well, it is nice to see a borrower come in with a little experience, but I have learned over the years that success in this business isn't as much about experience as it is about common sense and the willingness and the ability to work tenaciously toward the completion of a project. So if you don't have experience but you can show me that you have the drive and the common sense, I'll give you a chance.

What sort of credit and financial stability do you require from the borrower?

We don't have specific underwriting guidelines. As far as credit, are we looking for a perfect credit score (though we do have quite a few borrowers with credit scores in the 700s). We are looking at a pattern of payment over time. If a person has had a few bumps in the road or even a BK, for example, along the way, this doesn't bother us. What concerns us is the borrower who has consistently shown a disregard for debt obligations over a period of time. We probably won't want to get into a project relationship with this person.

Regarding financial strength (net worth and income), our primary concern is seeing that the borrower has either enough income (stated) or enough cash or liquid assets (stated) to get through the project. That means showing the capacity to (a) make payments for the duration of the project (if an interest reserve account has not been set up) and (b) weather a few bumps in the road if the project doesn't go exactly as planned. Beyond that, we don't expect our borrowers to have any great wealth. We know that they are in the process of attempting to build something, and sometimes that starts from practically nothing.

What is the term of your loan and how are the payments handled?

The term of the loan is generally one year, though if a project is expected to require longer, we can make a loan for two years or more. Payments are made monthly and are interest-only. If there is enough equity in a project, we can arrange to have some number of payments held in reserve and applied to the loan for the initial period of the project.

What are your rates?

For this sort of thing, rates generally range from 11-14%. The rate is determined by (a) the LTV, (b) the strength of the borrower, (c) the amount of leverage involved, and (d) the merits of the overall project.

Does the borrower pay interest on the full amount of the loan or only on the funds that have been disbursed?

The borrower must pay interest on the full amount of the loan for the duration of the loan. Funds can be escroewd and as such, the funds are not available to the lender throughout the duration of the loan and thus the lender has committed these funds and cannot utilize them in any way or earn interest.

What fees are involved?

We charge a loan fee equal to 6% of the gross amount of the loan. We also charge a doc prep fee and a collection account setup fee which is based on the size of the loan and averages ect.. There are no hidden junk fees.

Can the fees be paid from the proceeds of the loan?

Yes, if there is enough equity in the project. This is frequently the case.

Is there a pre-payment penalty?

Each transaction is differnt. We generally do not have prepays. Prepay can range from six to twelve months.

What happens if there is money left in the construction account upon completion of the project?

Once the borrower has demonstrated that the project is 100% complete, we will disburse any remaining funds in the construction account to the borrower. Otherwise, these funds will be credited to the borrower at the closing of escrow.

How long does it take to put the loan together?

We generally ask for a minimum of one week from the time we review a project packet until closing, though we can close faster to accommodate special circumstances.