Buying a Property Based on After-Repair Value (ARV) Using a Private Money Loan

Interviewer: Are you doing any loans based on after repair value?

Todd Wilson:   We are doing some and the key to those is the borrower still has to have some money into the deal.  If they don’t have any skin in the game, there is no investor that we know of, that’s going to put up the money for the rest of it.

Because otherwise the borrower, if anything starts to go sideways, they can just walk away.  They have nothing in it, nothing to lose.  So if a borrower comes in and they want to put in, lets say 30% down, lets say they are buying a property just to be able to throw out some nice even numbers.

They are buying a property for $200,000.00 dollars, they put 30% down, which is $60,000.00 dollars.  So they are putting that in and whatever the closing costs would be at closing and then the after repair value is $300,000.00 dollars.  Lets say it’s gonna take $40,000 dollars to get that property up to where it’s gonna be $300,000.00 dollars.

So then we could do that loan, but that $40,000.00 dollars is going to be held and released as construction is done or as the rehab is done. They don’t just hand it to the borrower and say “Here you go, here is your money call us when it’s done”.  They want to make sure that it’s done in a workman like manner, they want to make sure that it’s done with permits and they want to make sure that it’s done with the money that they are being given.

Nobody wants them to go out and spend the money on hookers and beer. (Laughing) Have a good time!

Interviewer: Or if the investor calls in to check on the rehab and the guy is at the lake with his new boat.

Todd Wilson: Exactly and we have heard stories about that sort of thing in the past.  I’ve definitely heard stories talking to other investors and they said ‘Oh ya, I’ve had one where I did a construction loan and the broker just released all the money to the borrower.  I go to see the house and nothing is done and the guy has a brand new truck’.  I will tell you that investor was not a happy camper.

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