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Bank Owned Property Loan: Are these good loan terms?

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Anonymous
Not applicable

Bank Owned Property Loan: Are these good loan terms?

Hi all,

 

I am trying to buy my first property. It is an out of state investment property owned by a bank. It is a multifamily dwelling that had poor management and needs to be turned around.

 

Here are the terms being offered to me. Do these look acceptable?  

 

Option 1:             20% down

 

1)      The land would be a 15 year repayment on a 5/1 ARM product.  The loan would be fixed for the first 5 years at 4.25% and then adjust annually after that.  There would be an annual cap on the rate increase of 2% with a loan cap of 6%.

 

2)      The multifamily dwelling loan would be a 7 year repayment with a fixed rate of 5.25% for the full life.

 

Option 2:             30% down

 

1)      The land would be a 20 year repayment on a 5/1 ARM product.  The loan would be fixed for the first 5 years at 4.25% and then adjust annually after that.  There would be an annual cap on the rate increase of 2% with a loan cap of 6%.

 

2)      The multifamily dwelling loan would be a 10 year repayment with a fixed rate of 5.75% for the full life.


Any loan approval would be subject to receiving a management contract on the property.  This requirement would stay in place until such time as the property would show a 1.35/1.00 DSCR as reported on a year- end federal tax return.

 

Our normal terms on prepayment are 3,2,1% for the first 3 years.  If needed we will and can allow for additional principal reduction during that time.  We just need to know the planned amount so our language can allow for it.

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tnvols
New Contributor

Re: Bank Owned Property Loan: Are these good loan terms?

I would avoid ARM at all costs with the rates this low.  Our last ARM got us in a ton of trouble.

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kc0039
Established Contributor

Re: Bank Owned Property Loan: Are these good loan terms?

Multi-family as in 5 or more units? or 4 units or less?

Licensed in IL
Message 3 of 7
Anonymous
Not applicable

Re: Bank Owned Property Loan: Are these good loan terms?

More than 5 units. It is actually a mobile home park. 

 

My concern is that if I hold on to the property for more than five years, my mortgage payments could eventually really kill my bottom line if I am not able to re finance to a fixed loan.

Message 4 of 7
Anonymous
Not applicable

Re: Bank Owned Property Loan: Are these good loan terms?

Never do an ARM of any kind if you don't intend to fully pay it off before the rate resets.  By 'pay it off' I mean pay it in full, not assume you can or will refinance with another loan.

 

I've owned investment properties since I was in my late teens, and I've almost never seen a new investor stick aroun when they jump in with an ARM.  In 25+ years, I've seen MOST new investors getting ARM loans hit foreclosure soon after rate reset.  It's usually pretty ugly.

Message 5 of 7
kc0039
Established Contributor

Re: Bank Owned Property Loan: Are these good loan terms?


@Anonymous wrote:

Never do an ARM of any kind if you don't intend to fully pay it off before the rate resets.  By 'pay it off' I mean pay it in full, not assume you can or will refinance with another loan.

 

I've owned investment properties since I was in my late teens, and I've almost never seen a new investor stick aroun when they jump in with an ARM.  In 25+ years, I've seen MOST new investors getting ARM loans hit foreclosure soon after rate reset.  It's usually pretty ugly.


Most commercial loans are ARM loans. I said commercial loan because it's more than 5 units.  If they are fixed, they'd probably tell him 8% interest or take a hike.

Licensed in IL
Message 6 of 7
Anonymous
Not applicable

Re: Bank Owned Property Loan: Are these good loan terms?


@kc0039 wrote:

Most commercial loans are ARM loans. I said commercial loan because it's more than 5 units.  If they are fixed, they'd probably tell him 8% interest or take a hike.


Yeah, I'm aware.  I am a big fan of hard money loans for getting commercial properties done but they usually require payment in full in a VERY short period of time at a very high interest rate.  I have a ton of close friends who are landlords like myself, and none of us mortgage investment properties typically.  Hard money is useful to close on a deal very quickly, but I personally am glad I don't have loans against investment properties, especially remote ones that I am not nearby to handle.

 

I've seen for decades people take out ARM loans on investment properties with diamonds in their eyes -- to this day, I have not met one who was successful doing it.  Either they wanted to flip it and failed eventually, or they wanted to refinance at the end of the ARM term and found they couldn't (lack of equity, or inability to get financing, whatever million issues were at play).

 

I am currently bidding on a condo in a unit where I own another condo because the investor bought it on an ARM and now can't refinance because the banks won't touch a building with 90% renters and 10% owner occupieds.  He's freaking out because his ARM reset and his payment has gone vertical beyond what he's getting in rent.  So we're all vultures circling, hoping to snag it for cheap.  I probably won't win the bid, but this isn't the first time this has happened in 18 years of me owning in this building.  Seems to happen every other year and it's not a huge building.

 

ARM loans are fantastic if you know you can pay them off in full -- you can save quite a bit over a fixed rate loan but you don't get 30 years to pay it off.  Lots of wreckage stories of folks getting ARM loans with big assumptions that they'll just refi into fixed, but investment loans carry different requirements and burdens.

Message 7 of 7
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