It is not the same to evaluate financing unimproved versus improved properties, short term vs long term loans or the level of risk
the borrower represents.
To put it simply, financing real estate projects varies significantly from one borrower to another, AND from one type of property to another.
To make sure we are on the same page: in Hard Money Lender's terminology, an unimproved property means the property does not have a structure on it: for example,
- a vacant lot or vacant acreage is an unimproved property. An improved property means the property has a structure on it (regardless of its condition).
- In the residential arena, an improved property can be a single-family dwelling, a duplex, or an apartment complex.
- If it's a commercial property, an example would be an office building, a shopping center, a warehouse, or a data center.
As far as borrowers, a lot of it depends on their experience, how leveraged they are, and how much down payment they are ready to put in. In other words, how much skin are they willing to put in the game from the get-go.
In this blog Will rents keep going up? As a Real Estate Investor in 2022, this is a question you should consider, we'll give you some essential guidance as to what a lender thinks about when evaluating your investment project, whether starting from a vacant lot or a duplex:
Pricing based on risk assessment.
Let us say that a real estate investor comes to AMI Lenders to ask us for a loan. What should she know?
To start with, a valuable piece of knowledge is that hard money lenders like us price their loans based on assessing the risk involved in the project under consideration. For example, ground-up construction has a higher risk of default than investing in a "fix & flip" property.
One way of summarizing it is that "more is at risk when there is less on the ground." Building a new house will require more expensive financing than improving an existing house.
Another explanation is that with a traditional mortgage, your home acts as collateral — if you do not meet your payments, the lender can seize your home. With a home construction loan, the lender will seize something that's not complete, so they tend to view these loans as more significant risks.
Pricing based on loan duration.
A hard-money lender will also price loans higher based on the number of months or years financed. For example, a one-year loan is less expensive than a 5-year loan because there is less risk of financing costs fluctuations.
A borrower generally has options for the length of the loan.
- One year or less.
- One to three years.
- Three to five years.
Longer-term loans are more expensive because the lender cannot adjust the interest rate if borrowing costs increase. Since, in most cases, it takes longer to build a new house than to fix an existing one, building loans are usually more expensive than home improvement loans.
On new construction loans, a lender will most certainly request from the investor:
- A line-item budget for the construction.
- Evidence of the builder's experience.
- Approved plans and permits. (These do not come cheap, by the way.)
- Slab survey.
In Fix & Flip investments, some of the requisites include:
- The contractor must have experience working fix & flips.
- You will also need to submit a line-item budget for the repairs.
- You will need to submit a Construction permit if the county requires it.
Furthermore, in our case, the contractor must assign the M&M Lien rights to AMI Lenders Inc. What is this? In Texas law, the "Mechanic's & Materialmen's Lien" (M&M Liens in shorthand) exists.
An M&M Lien covers nearly everything associated with the building trades from start to finish, including surveys, labor, materials, rental equipment, and other resources used in building, remodeling, and repairs to real property. Suppose someone does not honor a contractual obligation.
In that case, this type of lien is a cost-effective method for a contractor to collect from owners and a subcontractor to collect from the contractor.
Home Improvement Loans have other types of requisites:
- By law, a borrower cannot do any of the work (including tear-out) and must hire a licensed contractor.
- The more equity you have in your house, the lower the interest you will probably get.
Summary
Now you have an idea of what goes through a lender's mind when evaluating a real-estate investment project:
- Property Type
- Risk level
- Loan term
- Borrower's experience
- Completeness
Finally, keep in mind that the requested information can be more detailed for an unimproved property loan. However, you will be required to turn in information to the lender, no matter what type of investment you want to finance. Some projects will require information not required for other types of investments.
AMI Lenders is here to help
If you have decided to invest in a real estate project, whether on an improved or unimproved property, consult with AMI Lenders. We are one of Houston's fastest closers and could become your financial ally. We fund our loans and can close as fast as the law allows. Borrowers in Houston will also have difficulty finding lower rates for hard money or private loans than ours. We want our customers to succeed and take advantage of the financial opportunities provided by real estate investments.
