Sometimes a real estate deal makes sense on paper but is declined a loan. What are the top 3 reasons to decline a real estate deal when the numbers make sense?”
1. Neighborhood: The property is located in a high crime or extremely distressed area. Sometimes this is where the good rehab properties are found, but if most of the houses in the neighborhood are all boarded up, most Private money lenders will pass on the loan. This could be called “red-lining,” but in the case of Private money rehab loans, you are just not in the same game as an FHA loan.
2. Location: The property is located outside of a major metropolitan area in a rural location where there are no sold comparables within 2 miles of the subject property. Private money lenders prefer to lend in major metropolitan areas where sold comparables are 1/4 mile to 1/2 mile away. Although a real estate deal in a rural area may look good on paper, if there aren’t sold comps nearby to support value, a hard money lender may turn it down. Also, with a smaller market, you have a smaller pool of buyers. There are exceptions of course.
3. Cash Reserves: Particularly on a rehab loan, a borrower who seems to be undercapitalized may also receive a decline. Lenders want to make sure a borrower can afford to carry the loan. On a rehab loan, a lender wants to make sure a borrower has a contingency fund. If it seems that a borrower is scraping by to make a loan work, this may be a decline.
If you’ve been turned down for a Private money loan on a deal that made sense on paper, please share your experience. Why were you declined for the loan?
If you are a Private money lender reading this, please share your reasons for declining a real estate loan, even if the numbers made sense on paper.