Access to private lenders enables rehab of income property

Property type: Two-unit mixeduse property in Berkeley.

Property value: $2.45 million.

Loan amount: $1 million.

Loan type: Refinance five year fixed rate balloon loan.

Rate: 9%.

Backstory: My client owned a two unit property in Oakland, living in one unit and using the other for his business. No longer needing to use the second unit for his business, he had started the process of converting it back into a residential unit, a major project because that unit had been completely gutted to create an open floor plan consistent with today’s office styles. Midway through the project he ran out of funds so applied for a traditional loan and HELOC to finish the job.

As a self-employed person his taxable income as presented his tax returns was not sufficient to qualify for the amount he needed, as, in addition to restoring the residential unit, he also had embarked on a major remodel of the unit he occupied. Thus, there were two major problems: lack of income to qualify and major work in progress, the latter issue being a factor that prevents virtually all institutional lenders from lending because of concerns about potential mechanics liens and lack of certainty about the outcome of the project.

Thankfully my client had two major things going for him: excellent credit and a property that, even in its current condition, appraised for $2. 45 million. So, while he needed a large sum of money to complete the project, prospective lenders could take comfort in the fact that the requested funds represented less than half of the property value, so that should the matter have to end in foreclosure to recover the loan funds the lender’s interest would be well-secured.

I contacted one of our private money sources, a firm that aggregates funds from a investor group to make nontraditional loans that institutional lenders are not willing or able to do. While all lenders are now required to verify “ability to repay” most home loans, when the purpose of the loan is characterized as “business purpose” there is much more laton itude in establishing affordability. Because this project involved remodel of a rental unit it met the “business purpose” criteria.

With current high rates and tougher lending standards it is often difficult for people with “make sense” situations to obtain financing. In this case my client was able to accomplish his objectives, knowing that when rates fall in the next few years he will be able to reduce his rate and borrowing cost.