Workarounds and Exceptions When Working with a Lender

When applying for a loan in hopes of securing a real estate investment property, there are always lender guidelines to keep in mind. These guidelines are crucial as they allow lenders to set a baseline of expectations for borrowers to meet when starting the application process.

However, it can often be a smart decision to ask if a lender is able to offer or willing to discuss exceptions or workarounds for certain scenarios. If the lender shows extra effort and wants to come up with solutions to try and do business with an investor, it is a great sign that you are speaking to the right one.

Here is the second installment of workarounds and exceptions to keep in mind that RCN Capital offers and ones that another lender may as well.

Initial Advance Below Minimum Requirement for Fix & Flips

This exception is crucial for investors to know about if the property value is at or slightly above $50k for 1-2-unit properties as there may be an issue with the initial advance on a purchase being below the minimum requirement of $50k for the program. This is an area where we are still able to lend on the property, but RCN would require full boat interest.

At RCN Capital, the only difference for Full Boat Interest would be that we charge interest on the full loan amount, both the initial advance and the renovation funds held in escrow. Also, there would also be a two percent increase to the interest rate of the loan. In a normal fix and flip loan scenario, interest is only charged on outstanding funds, not the renovation holdback.

If the investor has faith in the property they want to invest in, and the interest rate increase is something they are okay with, then this exception could be a very valuable one for investors to know about. If this exception strategy is used in the fix-and-flip loan program, the interest rate increase isn’t as harsh if an investor can complete the flip in 4-6 months since there are no prepayment penalties on that specific loan program at RCN Capital.

Letter of Explanation (LOX)

When it comes to asking your lender for an exception or a workaround, a letter of explanation (LOX) can be a big help. Prepare and submit a letter of explanation for any non-standard transactions when you submit required documents. Lenders are likely to ask for one when there are extremely large deposits, previously allowed exceptions on current outstanding loans, or unusual background check flags. Letters of explanation are always a plus to submit for a drastically reduced purchase price as well.

This can also be used for properties where the purchase price is below our minimum property value requirements, but the as-is value exceeds our minimum requirements. This is more common with auction purchases or foreclosure properties, but a letter of explanation shows initiative to a lender and providing background information makes life for the lender much easier. Once they see an investor submitting an LOX on a consistent basis, they are more likely to work with them and go the extra mile to make an exception for the investor.

Also, as a reminder, a letter of explanation (LOX) does not need to be an official document. Just type up an explanation using Word or a similar program and submit it along with your other documents.

Does the Property Fit Neighborhood? (White Elephants and Unicorns)

This workaround is more of smart practice that borrowers should employ in a number of different scenarios. Whether it is a purchase and rehab, buying a potential rental or starting a ground up construction project, having a property fit-in with the rest of the neighborhood is a recipe for success. Properties that do not fit in their respective neighborhood can be referred to as “white elephants” or “unicorns” and they are something you want to avoid in the real estate investment space.

Sometimes renovation plans can be very ambitious to create the best and most modern property that fits the investor’s standards. However, if the rehab plans produce a property that ends up being valued much higher than its surrounding neighbors, the shiny new renovations can make the property undesirable instead. Even if it is a beautiful property, if it sticks out too much in appearance and especially in price, you can expect the property to stay on the market for a longer period of time and the price will eventually have to be lowered. In this scenario, the investor stands to lose money because after all that work, they will not get the expected purchase price due to property being so different than the ones in the surrounding areas.

Existing Appraisals

Having an existing appraisal is an exception that RCN Capital and other lenders can make and if it is accepted by your lender this exception is a great way to save time and money. At RCN Capital, if the appraisal is performed 120 days before the date of closing, then RCN can accept the appraisal.

It must be a third-party appraisal and come from a verified source that RCN can trust, but we will take a look at it and hopefully be able to accept it.

Ordering another appraisal may take anywhere from 2-4 weeks and on average cost an extra $500-$1500. If you have an appraisal already completed do not hesitate to send it in.

Even if we cannot use it, it would not hurt to have multiple valuations of the property.

Exceptions and workaround are crucial to know about the real estate investment property industry. Asking your lender about them and becoming more knowledgeable on what certain lenders can offer is a huge advantage for investors. With part 1 and 2 of Workarounds and Exceptions now available, you should be well-versed on how to gain even the slightest edge to make a deal work.