Loans Based on True Value
In the world of navigation, there is "north" and there is "true north." In the world of real estate finance, there is "value" and there is "true value," and when you are dealing with professional buyers, these two figures are very rarely the same. We make it a point to loan based on true value, regardless of what the purchase price for a property might be. We recognize that no investor worth his salt is going to pay true value for a property. Most professional investors don't pay more than 70% of true market value when they buy a property for re-sale.
In addition, we are willing to loan the funds for renovation of a property and to base the loan amount on the projected value (as opposed to the AS IS value) of the subject property. Below is an example of the sort of thing that we do.
Scenario: We were approached by an investment buyer who had locked up the right to purchase two city lots and a flood damaged geodesic home from HUD for $124,000. Our borrower desired to renovate the geodesic home and place it back on the market for $295,000. In addition, he believed that he could sell the additional vacant lot for $125,000.
Problem: Our borrower was short on cash and couldn't find a lender willing to loan 100% of the purchase price, plus $65,000 in renovation funds, and all of the closing costs and fees associated with the project. Our borrower had a good opportunity and a good plan, but needed full leverage to make it all come together.
Analysis: We looked at our borrower's project and agreed with his estimated repair costs. We also looked at comps for the geodesic home and for the additional lot. Again, we agreed with out borrower's assessment of value.
Solution: We arranged a loan to cover all costs associated with the project. We held the renovation funds in our client's trust account and released these, per our borrower's draw requests, as the project was completed.
--S. Clay Sparkman, Vice President
