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In California, lending on residential rehab projects is considered as a relatively safe investment option during accelerating as well as declining real estate markets. The best way to lessen risks associated with rehab lending is by providing low loan-to-value (LTV) ratio on loans.
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In California, lending on residential rehab projects is considered as a relatively safe investment option during accelerating as well as declining real estate markets. The best way to lessen risks associated with rehab lending is by providing low loan-to-value (LTV) ratio on loans. LTV measures the percentage of the value of the property that is meant to be financed with a loan. For lowering the risk, the first step is performing thorough research on the borrowers who have submitted their loan requests. Not only in case of rehab lending in California but in every business the key principle is to know the person well with whom you are dealing whether it is your business partner or your borrower! It is extremely important for a lender to check and know about the previous projects of the borrower which includes completed projects, current projects, liabilities and likewise. This is because when you choose a reliable and more qualified real estate borrower who has an established track record the risk of any defaults of the loan in future reduces to a great extent. The next thing that is important for lessening the risk of each potential loan investment is taking a more conservative approach as it adds value to the projects. Make sure to choose suitable real estate operators having enough security value for protecting the rehab lender in the worst cases of downside risk. Therefore, finance each loan to a conservative 65 to 70% LTV as you get maximum security from the project. When you provide high LTV loans there is a possibility of greater risk and controlling the real estate prices is next to impossible when the rehab project is completed and put on the market for sale. So a low and conservative LTV approach can be the best way to protect your investors.
Rehab projects are based on an ARV value, which can justify lending 100% of the LTV of today’s“As-Is” value. While evaluating such a project risk adjusted loan investments are the key. Therefore, the process of lessening the risk should begin with a thorough research about borrower followed by a conservative LTV. As it is a rehab project the future value will increase i.e. the 100% LTV loan of today will be 65% in the future for its completed value. This benchmark is ensured through the process of fund control – controlling and disbursing the funds for the rehab work. Ensuring the work gets done also ensures the ARV LTV stays within guidelines. In short, rehab lending in California is a process that originates from borrowers needing funds for improving a property and hence improving the community and neighborhood. As you can see how important the role of a borrower in such scenario is, therefore, it is extremely essential to check the track record of the borrower as it holds a great importance in guaranteeing loan decisions to protect the investors. By balancing aggressive financing, proper valuation, a managed fund control account and borrower experience, lenders can help mitigate risk to investors while still offering highly competitive and flexible rehab loan terms.
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