Let’s Look at Two Situations Which My Clients Face from Time to Time…
Client 1 wants to buy a lovely home that needs a significant renovation. Purchase price: $2million. So, not only do they need the downpayment for the purchase, but then they need to put another $500,000 into the unit. Do they have the $400,000 downpayment? Yes. So far, so good. And would they have the $500,000 if they had purchased the unit fully renovated for $2,500,000 (20% of the $2mm purchase price and 20% of the $500,000 additional)? Yes.
BUT….do they have the $900,000 to get them from the purchase ($400,000 investment), through the renovation ($500,000 investment), through to the refinance when they could pull roughly $400,000 back out? No.
Client 2 wants to upgrade his family’s apartment- that is, buy something bigger. They have an apartment worth $3mm, and they want to upgrade to a $3.5mm home. They want to buy and sell in the same market. That is, if they are upgrading, they don’t want to sell first, in a softer market, then rent, and then find themselves struggling to find the next place as the market got stronger- when that $3.5mm apartment is now worth $3.75-4mm and out of reach.
Or even if they conceptually could buy before the closed on their sale, but are risk averse- they just don’t want to own two apartments simultaneously, leaving them exposed if the stock market tanks, they get fired, or some other calamity befalls them. These days, there are plenty of disasters to contemplate. The most realistic one would be that they have sold their home, can’t find a new apartment at a price they can do, and face the prospect of being permanent renters at very high rental rates.
They just want the funds from the sale to help buy the next apartment, and they don’t want to rent in between. The reality makes this really hard- they cannot time the purchase side to coincide with the sale, because no seller will want them as a buyer until they have the proceeds from their sale IN HAND. This creates a situation with total paralysis. What to do?
Really, What To Do?
Most People would just shrug, and say, “Welcome to New York.” But that isn’t an answer, and that answer doesn’t get deals done, either. At a time when the market needs all the help it can get, two solutions are emerging that are intriguing. Scenario One I have had clients go through with a successful solution that we’ll discuss- The Coop Construction Loan. I am still struggling to fully grasp how to best solve for Scenario Two…The Bridge Loan Program is less obvious. And if it’s hard for me to understand, I suspect that it will be less of a slam dunk our second example, and for cooperative boards.
Cooperative Construction Loans
This concept has worked, and if banks will allow it, and cooperatives will entertain the concept, this seems like a win (buyers)-win (sellers)-win(market).
Here’s how it goes:
The bank agrees to lend against the purchase price of the apartment and the renovation cost as confirmed in a detailed contractor estimate, together. They agree to lend on a fixed percentage of the total cost. If it’s $2mm and $500,000 renovation, they will lend, say, $2mm total. The purchase price of the apartment is funded at the closing, and the $500,000 is doled out as the contractor meets his obligations, paid directly from the bank to the contractor.
Benchmarks met, funds paid, with the borrower never touching the construction funds at all.
It seems entirely clean. The only wrinkle? The cooperative board has to approve this kind of loan. I never thought that I’d see this happen, but just six months ago we did our first one with Citizens Bank, and are working on our second. It’s an exciting prospect, and one that opens up all sorts of properties to buyers. Qualified buyers, mind you.
The upside for a buyer?
The upside for a buyer is no second round of paper submission for a refinance, either with the coop board, or the bank. One painful time, and you’re done. Second, there is the strong push to really carefully plan one’s renovation, so that the budget you create is the budget you stick to. It frontloads the planning more intentionally. Lastly, there is some paper gain and satisfaction, knowing that you’ll have an appraisal that says when you are done, your home is probably not just worth A+B, as described above in the $2mm + $500k example. In that case, there was no upside. In reality, the $2.5mm all-in made for a property value of $3.2mm when completed. You can see, from the start, that your work is worthwhile. And that energy can carry even the busiest New Yorker through to the other side.
The upside for a seller?
A seller just wants to get her apartment sold. But in a market where properties needing work are harder, much harder, to sell, this opens up the market to a new pool of buyers. Bigger audience = better price. That is the mantra that we chant every day. That’s why we market in the first place. I’d also mention that cooperative boards have more transparency about what a buyer aims to do with his/her renovation. And boards like transparency. Clarity around this lending product- because the explanation can be really clean and leaves nothing to the imagination- is really straightforward.
In all, this is a product that almost everyone can get behind. I expect more buyers and boards to get “on board” with construction loans.
Bridge Loan Programs
While we all have long tired of seeing our favorite old actors like Tom Selleck and others hawk reverse mortgages, I would be SHOCKED if we didn’t see more advertisements around bridge loans hitting your ad platforms and TVs soon.
This is big business. Companies like Avenue 8 are coming in to be real estate firms with the lending built in. And established firms, one by one, are offering a bridge loan program to help our dear seller/buyer situation as described above. What is the upside? Who is the audience who will actually be approved for a loan like this? Is it really something that will take hold outside of condos/coops with more regularity, given the nasty approval process one needs to endure here?
You can see our internal marketing below…