I have had several financing inquiries recently where investors are considering the purchase of distressed assets at, well, distressed prices. The most frequent question regards what the lender will require in a down payment if the sales price is less than the appraised value. The hope is that purchasers will be able to put little or no cash down if the loan to value ratio is 80% or better.
Now my friend and co-columnist Tom Cook may bristle at the implication that appraised value is higher than the sales price. In normal times, he as an appraiser might argue that a property is worth what an arm’s length purchaser will pay and that a situation where the purchaser says the sales price is significantly less than the “appraised” value is highly suspicious.
Tom, suspend your suspicions for the moment because the banker would not be influenced by the situation even if your value were higher than the purchase price.
The banks need cash down payments of 20% or better on purchases. Plain and simple. If the purchaser is getting a great deal and a 20% down payment would mean that the loan to value would be 75%, 70% or lower, the bank still needs that 20% down payment.
Remember that most banks size loans at the lower of (1) 80% loan to cost, (2) 80% loan to value (or lower, depending on the asset type) and (3) a loan amount that satisfies cash flow coverage requirements. In years past the banks might have stretched to get a deal and allowed the borrowers to put in less cash as long as the loan to value requirement was met. But not anymore.
Those of you who are looking to pick up properties at distressed values should expect to see requirements for significant cash down payments, even if you are getting a “good deal.”
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at email@example.com.)