Refi Rules Just Changed

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     ​In my daily financial update or financial news video, I wanted to record a second video about some financing changes that I learned about yesterday evening when a when an investor and friend called me in a, in a panic, you know, about, about what was going on. So let’s kind of set the stage this, this change does impact the market that I research and follow, which is Fresno, California. I suspect it impacts all of California given the lender that’s involved. But really for anyone in the country, realize that if you’re executing the borough strategy by repair, rent, refi, repeat that, that I’ve always talked about, you have to make sure the exit is secure, right? Which means the refi, right? The burst strategy breaks down. If you can’t exit, get your money back, either your money or your private investor’s money and it can lead to some very uncomfortable situations.

     So let me set the stage again, this is for my market likely for California, but, but really needs to be paid attention to across the country. Cause when financing rules changes that are overnight and a bird project is not overnight. So in my market, I’ve known dozens of investors to leverage an institution called cash call mortgage. I’ve actually used them. They are by no means the cheapest as far as fees and interest rates, but they have proven time and time again to execute the refinance for investors. And the rules were pretty simple. There a, there was no seasoning period. So if you found a good deal and you could get it cleaned up and rent it in 45 days, you could go to cash call assuming everything else was okay and execute the refinance, which you mean appraisal. And on all of that, I’ve known several somewhere between five and 10 investors just in my little market that had routinely exited bird projects in under 90 days, which is wicked fast.

     Unfortunately, one of the rules just changed. And, and I learned about it last night and now cash call is going to require a six month seasoning period. So they want the owner to own the property for at least six months. And I suspect, again, I haven’t read it specifically, I suspect they’re actually going to want to see the property leased for six months. So that could mean an eight-month hold. Which interesting. This may not seem like a lot, or an issue, but it is, especially if you are executing Burr with private money, right? If you were budgeting, let’s call it three months, hold time at 10 or 12% or whatever you’re paying and now you’ve got to hold it six to eight months, that hurts at a minimum, your profit is going to be impacted. For some of you would probably make the deal not worth it.

     So that’s, that’s an interesting change and frankly I was always shocked that cash call would routinely refi these. So it doesn’t surprise me that the rules changed. But they did. And I think some people are going to get caught with projects that were maybe skinny that they thought they could get in and out of quickly that now they’re already in. Right? They can’t go back. And use the rules during the, which when they acquired it, they have to use the rules that today. So that’s the first rule that changed. The second one is I, you know, a lot of people are executing these bird projects inside of LLCs, limited liability companies. Many of these LLCs have multiple members. The person that called me last night, for example, had two members of the LLC. And now what cash call is going to require is if you’re doing the refi, they want both of the members of the LLC to sign for the loan, right?

      So they’re both on the hook for the loan as well. Historically, what this partnership would do is they would go, this one’s yours, this one’s mine, this one’s yours, this one’s mine. So it would just, it would just alternate between the partners who would sign in, be on the hook for the loan. Again, I understand why cash call would do this. But it’s going to make multiple-member LLCs and, you know, just the thought of the future more complicated for folks. You know, are they going to set up multiple LLCs? And have additional costs for that. Are they going to be less likely to partner now? Right? There are all these things that could come in when the rules change, and again, a bird project is somewhere between three and nine months in duration. So there are lots of projects already committed and spent that now they have to think about the exit differently, but that’s not the biggest change.

     Here’s the biggest change, and I think this is going to hurt and I think this is going to hurt a lot of people. Again in my market and likely in California cash call mortgage, the minimum loan they would do with 75 grand was 75 grand, right? They wouldn’t touch the things at 50 grand or anything below that. So if you think about a 75 K loan, that means the house would have to appraise at 107 grand, just over 107 grand at a 70% LTV. So they would, the property appraises at one Oh seven the existing owners take 30% equity and then the bank would do the loan at 70% that’s how that would work. Unfortunately, cash call has come out and said, we are no longer doing loans under a hundred K think about that. So the minimum loan they would do up until last week, probably right before or after Thanksgiving was 75 K and I have some of these, some of the loans that I realized were between 75 and a hundred they do not want those loans anymore.

      The minimum now is 100k so where before the house had to appraise for 107 at a 70% LTV. Now the house has to appraise for 142 now some of you are watching this, you’re like, what are you, what are you worried about? Oh, I mean 142 grand. Isn’t that every house around? No, it’s not a, there are plenty of areas in Fresno where you know you could get a house under 200k even after fully repaired. It’s going to be an older house built in the 50s and small footprint and all of that. But unfortunately, what this means now is again, the people executing the burst strategy who are counting on cash call mortgage to do the refinance, and they were hoping for a minimum loan between 75 and 100 grand are stuck because cash call doesn’t want that loan now.

      So what’s going to happen? So I think there’s going to be a lot fewer transactions because the seasoning period, right more before people were getting in and out in less than 90 days, now it’s going to take six to eight months. That’s going to slow down. You know, purchases and refi and recycling capital. It’s made it less profitable because now you have six to eight months of carrying costs. Verse three, and you’ve just changed the game because of the loan limits, right? Raising the low, the minimum loan from 75 to a hundred K is going to impact Fresno.

      Now it’s possible some other lender comes in and takes us up. I doubt it, at least in the short term, a cash call was kind of the one game in town for lots of people in Fresno executing the burger strategy. So there is going to be a lot of people watching this in Fresno going, Oh shoot, what do I do now? I think in the short term, a lot of these projects that were going on that we’re looking at executing Burr, I think they’re just going to list and sell them. They’re going to, they’re going to take their small profit and be done, which is not a horrible outcome. It’s nice to have options, but I think the Fresno area is going to see a lot less improvement. I think cash call changing, this is going to impact the revitalization of some communities in Fresno where, you know, it was just starting to improve and neighborhoods were getting hit and flooded with remodels and you know, the pride of ownership and all of this stuff.

      So it is unfortunate that this is going to change. But this is why in my previous videos talking about Burr, I was always so focused on the exit, right? There are so many failure points potentially in a Burr, but the most important to get right is your exit cause you want your capital back or you want your investor’s capital back. And unfortunately, if you were depending on cash call, we got to look somewhere else. If you’re between those 75 and a hundred K or a value, probably better said between 107 in one 42 right? So used to be able to get out with an appraisal of one Oh seven now the appraisal needs to say one 42 and that just takes a whole swath of real estate out of the market. So a couple of things. If you’re executing Burr in California and you are using someone other than cash call, do me a favor, leave the comments below.

       I know there’s going to be lots of people looking at this looking for a plan B. There were so many people comfortable with cash call cause they always delivered when they needed it. Now with these rule changes, some people are going to get caught. So if you know of a lender in California doing a burst strategies below a hundred K minimum, leave the comments below. I know you will be helping a lot of people out. In addition to this, always pay attention to lending. As I told my friend yesterday evening, wait four months, it could change, but that doesn’t help somebody. My friend was looking to execute 10 roofies in the next 45 days. Now because of these changes in the limits, he can only do four. That’s a huge impact he had. He had done, I don’t know, probably 30, 35 already in the last 18 months he was looking to do another 10. But because of cash call rule changes, he can only do four. What’s he going to do with those other six? He might just sell them. He might hope for a, you know, a commercial lender. I don’t know. But we’re gonna work on it together and see what happens. So in the end, let me know what you think again, please. If you know of another lender other than cash call in California, leave it in the comments below. I know you help a lot of people have a great day and take care.

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