New Investor- Fix and Flip Loan in Brooklyn, NY

We recently funded a fix and flip deal from a "new investor."  In the fix and flip lending world, a new investor is someone that has not completed (bought or sold) a deal in the last 36 months.  Now this definition can be a bit frustrating at times for borrowers.   We constantly get calls from borrowers that say, "I've flipped 30 homes, but nothing in the past few years because of the pandemic," or we get someone that says "I've built 20 ground up homes in the past for clients, but I wasn’t on title for any of them."  And then we have to gently explain to the borrower that they're considered a "new investor" because they don’t have any recent deals in their name, and we have to lower our loan amounts.  It's a hard conversion to have, because most of the time, we know that this borrower is very capable, but we just can't get them the best rates or leverage because they just don't meet the "experience investor" definition as per our credit lines and institution investors.  

There are other limitations besides leverage and pricing when working with a new investor.  If it's a true fix and flip deal, the new investor can't take on a project that requires a significant renovation.  We only like to see cosmetic renovations (updating kitchens, baths, floors, etc.).  We would not fund a project for a new investor that required any square footage expansion.  We try to keep the new investor renovation budgets to 30% of the lesser of the purchase price or as is value.  Furthermore, if the deal is a refinance, we limit "cash-out" loans to 65% of the As Is value for new investors.

Now that you have a solid understanding of the limitations "new investors" face when obtaining fix and flip loans, let me walk you through a recent bridge loan we just closed in Brooklyn, NY.   A borrower approached us to fund a single-family property she had under contract.  She was purchasing for just under $1m and had a reno budget of about $365,000.  She was a realtor that knew the area very well.  However, since she didn't buy or sell any properties in her own name, we had to consider her a new investor.   

The first thing we had to do was review the budget to make the $365,000 didn't include any expansion of the current property and see if we can reduce the budget to keep it under 30% of the purchase.  After reviewing the budget, we determined that the borrower had $65,000 budgeted for a pool.  We explained to the borrower that we need to keep the budget to under 30% of the purchase price, and she agreed to remove the pool from the reno.  We had no issue if she wanted to use her own capital to install a pool, but we couldn't include it in the loan.  Eliminating the pool only had a modest effect on the After Repaired Value.   Once the budget issue was settled, we then began the underwriting and determined that our borrower had to put down 25% of purchase price.  The 25% downpayment was a function of her credit, asset value and reno amount- while $300,000 is less than 30% of the purchase price, it's still a relatively large reno amount. If this borrower had more experience, the downpayment would have been between 15-20%.   

We closed this fix and flip deal for our borrower in short order and she has already started the renovation.  We're looking forward to doing her next deal!

Please see our website for more info on recent deals.

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