So now, we have our first offer from the bank, but we always try to get a better one…
In order to challenge the offer, you will need to understand the numbers inside out and provide some proof to the bank that will support your assumptions. For example – in our case, the bank calculated the income based on $750 per door per month. We knew that from other properties in the area we can rent it for at least $775 per month. In addition, the bank calculated expenses which are 58% of the income. This is a very high number especially since we are planning to have such extensive rehab.
The challenge is – how would you get the bank to agree with your numbers or assumptions?
The answer to that is – bring your assumptions to the level that the bank will feel comfortable with, meaning that the numbers will still be within the bank’s thresholds.
We have asked the bank what will be the DSCR and LTV ratio they will feel comfortable with and we started to calculate few scenarios that will bring us closer to the thresholds. Our calculation showed that if they will lower the expenses to 53% (which is still very high) they will be able to lend us $2,000,000 and still be within their threshold. With a loan of $2,000,000, the cash required for the deal will go down from $577K to $400K which means a great increase in the ROI. Our goal now was getting as close as we can to a $2,000,000 loan in order to lower our down payment and maximize the ROI.
After few calls and discussions with the bank, reviewing the numbers and explaining the rationale behind our ask, they have agreed to go to the loan committee with a loan of $1,950,000. The down payment, in this case, was $400,000 which was exactly in the range we wanted it to be – we were very happy and proud of the outcome of the negotiations.
It was too early to celebrate – in the next post, you will understand why…