Financing on appraised value or cost

[JohnKrahn]

When purchasing a building, what do banks/credit unions typically base the amount of financing on; appraised value or cost? There seems to be some inconsistency regarding this, and I'm wondering what others are experiencing.

 

[Thomas Beyer]

neither actually.



They finance on NOI !



They divide NOI by a DCR of 1.2 to 1.25 to arrive at a maximum loan payment.



This loan payment may be up to 85% of the lower of purchase price or CMHC value if CMHC insured .. or 80% of price if not CMHC insured.

 

[JoshWendeler]

Hi John,

Thomas is quite right, if the building is commercial, the value is established based on income. If however, the building is residential (usually no more than 4 units with residential zoning) then the "value" will be the lesser of the purchase price or it's appraised value.

Josh

 

[JohnKrahn]

That makes sense, thanks

 

[JimWhitelaw]

[quote user=JoshWendeler]If however, the building is residential (usually no more than 4 units with residential zoning) then the "value" will be the lesser of the purchase price or it's appraised value.This is true at the time of the initial purchase, but it is possible to re-finance later at the appraised value. We have done this on a property that was purchased well below market and appraised value. Re-financed 1 week after closing and pulled out most of our initial downpayment and still had 20% equity in the property. I'd sure like to find more deals like that one!

 

[Thomas Beyer]

[quote user=JimWhitelaw] .. We have done this on a property that was purchased well below market and appraised value. Re-financed 1 week after closing and pulled out most of our initial downpayment and still had 20% equity in the property.





Enlighten us please: I thought lenders don't do that anymore today, i.e. a re-fi has to be 6 months in or more to show some elapsed time ?

 

[JohnKrahn]

[quote user=JimWhitelaw][quote user=JoshWendeler]If however, the building is residential (usually no more than 4 units with residential zoning) then the "value" will be the lesser of the purchase price or it's appraised value.This is true at the time of the initial purchase, but it is possible to re-finance later at the appraised value. We have done this on a property that was purchased well below market and appraised value. Re-financed 1 week after closing and pulled out most of our initial downpayment and still had 20% equity in the property. I'd sure like to find more deals like that one!






I just recently had the same scenario on a 6 plex I bought which appraised at significantly higher than purchase price....initial mortgage was based on cost and lender said I could refinance based on appraised value after approx 1 year of ownership.

 

[JimWhitelaw]

[quote user=ThomasBeyer]Enlighten us please: I thought lenders don't do that anymore today, i.e. a re-fi has to be 6 months in or more to show some elapsed time ?That's certainly possible, Thomas. This was 2 or 3 years ago. Perhaps things have changed since then, or different lender have different policies.

 

[kboughen]

I suspect we may be talking about 2 different types of "Buildings". A 6 plex or under that may have been treated with residential rules and therefore qualified for 80% of appraised value, Vs a multi family with more the 7 units which would qualify based on the buildings financials.

 

[JohnKrahn]

[quote user=kboughen]I suspect we may be talking about 2 different types of "Buildings". A 6 plex or under that may have been treated with residential rules and therefore qualified for 80% of appraised value, Vs a multi family with more the 7 units which would qualify based on the buildings financials.









You are correct, the property/mortgage was treated with residential rules. Thanks all for the clarification re residential vs commercial mortgages

 

[LillianHo]

To my knowledge, Scotia bank will use appraised value after 6 months of your purchase. Otherwise they will use only purchase price. I don't know other banks.



Lillian

 

[Thomas Beyer]

[quote user=LillianHo]To my knowledge, Scotia bank will use appraised value after 6 months of your purchase. Otherwise they will use only purchase price. I don't know other banks.



Lillian




This is my experience with most banks I've dealt with too, i.e. Scotia, BMO, TD, FirstLine (CIBC) .. but to every rule there may be exceptions !