Most people are familiar with the LTV for traditional loans and the usual determination of the market (appraised) value to the amount of the loan. Hard money loans work in a different way, especially when it involves a property that requires some heavy repair and renovations in order for its true value to be obvious. This is a calculation that many people do not understand except when it pertains to loans for new construction, it is very common for hard money lenders in NY to use this calculation before they invest in a new venture.
Loan to Value: What it Means
Investors are always looking for a bargain in the real estate market, and sometimes this means picking up a property that is priced below market value because it is not in the best of shape. Old warehouses that seem abandoned or apartment buildings in serious need of repairs are just two types of property that may require a substantial amount of work (and money) before the asset will really make any money for the investor. Unfortunately traditional lenders seldom have an interest in these properties—at least in terms of loaning the amount of money the borrower needs to make the repairs and renovations.
Determining the Loan to Value Ratio
The LTV for hard money loans is not much different from calculating the appraised value to loan amount that traditional lenders use. The difference is that instead of using current appraised value to determine the amount of money an investor is qualified to borrow, each hard money lender in NY determines what the projected value of the property will be after all the repairs and renovations are complete. This calculation can be very difficult to assess thus the reason traditional lenders prefer to use the appraised or current market value of a property. Unfortunately this is very difficult in the case of depressed properties because after the investor sinks some money into the property it will be worth a great deal more than it appears at that precise moment.
Hard Money vs. Traditional Lender
In most cases hard money lenders will loan approximately 60-70% of the property’s value. While this is a simple calculation for ordinary property, it can become rather tricky when it involves property that requires a substantial amount of work to bring it up to code or meet certain standards. In that case the hard money lender in New York will agree to loan 60-70% of the expected value of the property after all work is complete. This is an advantage for the borrower because it means he may not have to put any of his own money into the deal.
In this respect it is definitely advantageous for a borrower to seek a hard money loan and when the project is complete finance the entire thing into a traditional mortgage loan. While the interest rate may be higher than a traditional loan, the borrower may not have a choice during this phase of the project. Hard money lenders in NY are likely to cost the borrower less of his own money than a traditional lender if the borrower could even convince a traditional lender to finance his “risky” venture.