Reduce or Repair? What’s Best for Your Deal? Scott Williams touches on scenarios for each path.
Scott touches on scenarios for each path, as well as possible reactions from your lender; and the effect each has on your loan amount.
Read transcript below:
Hi everyone, Scott Williams from Aline Capital here. I want to talk to you today about choosing between a price reduction or a repair credit on a deal.
Let’s say you’re under contract for a $10 million deal, and the lender has offered you a 75% loan, meaning you’re receiving a $7.5 million loan on the deal. Now, a couple of scenarios could play out. Perhaps you’re a bit short on equity and need to reduce the purchase price, or maybe you think you could get a better deal from the seller and negotiate a price reduction. However, I want to let you know that more often than not, the lender has already been very intentional about the 75% loan offer, and any price reduction you negotiate will likely result in a proportional reduction in their loan amount. For example, if you negotiate a $200,000 price reduction on the $10 million deal, the lender may reduce their loan amount by 75% of that amount, or $150,000, resulting in a new loan amount of $7,350,000. This isn’t necessarily a problem, but it’s important to be aware that your lender may reduce your loan amount accordingly, which could impact the deal later on.
Conversely, if you’re doing inspections during the due diligence process and find that $200,000 worth of repairs are needed, consider requesting a repair credit instead of negotiating a price reduction. When you take a repair credit, it doesn’t reduce the purchase price, which shows the lender that your basis hasn’t decreased by $200,000. For example, even though you’re paying $9.8 million instead of $10 million for the property, the $200,000 repair credit keeps your basis at $10 million. In this case, your loan amount might stay at $7.5 million, but be aware that the lender may want to escrow those funds for the repairs to be made.
So again, nine times out of 10, the lender will do something here in this situation. While they may not lower your loan amount, that $200,000 will not just be less equity needed at close. The lender will want to protect themselves and protect the basis of the deal and make sure that those repairs get made.
So, I want to make you guys aware, 9 times out of 10, if you negotiate a price reduction, your loan amount will be dropped by the leverage the lender was willing to give for the same amount of that price reduction. However, if you find a credit on a deal or find the need for repairs, definitely structure it as a repair credit.
In both situations, be sure to reach out to your mortgage broker or banker that you’re working with as soon as you’re negotiating either a price reduction or possibly needing a repair credit. That way they can address this as soon as possible and prevent an issue from coming up too late in the closing when we don’t have enough dollars at the table.
And always, if you have any questions or need more insight into topics like this, please feel free to reach out to any of us here at Aline Capital.