At Gap Investments, we generally lend money based on the Loan to Value ratio, typically under 50%. That means that if we appraise your home at $200,000, it is in a great location, and it is in great shape, you should qualify for up to $100,000.00.
Let me be clear, there is a difference between a retail or market value and our wholesale valuation. Our valuations are based on quick sales (within 3-4 months).
There are a few scenarios when we look at other factors, though. If the borrower has 5 additional properties, and we are lending on his principal residence, for example, we are comfortable lending a bit more because he would liquidate his other properties rather than lose his personal home. His wife would make sure of that!
A strong net worth, which we check as part of our due diligence, is important. Another primary example of lending a bit more than usual is if the person has a very high income and can prove it to us. Again, we check that out thoroughly.
High Income, High Net Worth, High Value
We just went through an example of this with one of our lenders recently. The borrower has a large mansion in a luxury beachfront community, and he is working on expanding it from 12 bedrooms to 16 bedrooms by remodeling the home.
He runs a very lucrative, luxury vacation rental company and has been for many years. This business provides airport pickup, shuttles, tours and more. He was looking to borrow $375,000 — $240,000 to pay off the existing mortgage, and the balance to complete the new pool and bar along with some other small amenities. The house is 90% to 95% complete.
The term requested was 3 years at 12%. We requested all the documentation including income statements, an appraisal by an insurance company (which valued it at $700,000.00 now, and $900,000.00 upon completion) as well as the standard tax receipts, building permits, and more.
After looking at everything, Gap Investments determined that $375,000.00 was a reasonable request. Why would we give that amount when it is a bit higher than our maximum LTV? Because his annual income surpasses the loan amount which gives us a great deal of comfort. The ability to pay the loan is as important as the asset value or value of the home.
Prime Location and Surroundings
The fact that it is in a prime location on the beach within a gated beachfront community surrounded by other incredibly large estates is the reason we recommended this loan to our investors.
The fact that this borrower has an annual income almost equivalent to the loan amount requested means that the loan is not going to be in jeopardy. We also reviewed his upcoming bookings, starting in December and going into 2019. They average around $8,000-9,000 a month! This is not a startup either, as this borrower has been running his company successfully for 7 years now.
Between the value of the asset, his income, the location and the fact that the building will have no depreciation for the first year, Gap Investments feels comfortable recommending this type of loan. This is a specific example, and all potential loans are assessed on a case by case basis.
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