Simply expressed, LTV is the loan amount divided by the property's value, expressed as a percent. The value used will be the lower of the sale amount and the appraisal. Banking theory goes that the lower the LTV the more the investor goes from involved to committed. Yogi Berra might explain that discrepancy thus: "In a ham and eggs breakfast the hen that laid the egg was involved, but the pig the ham came from was committed."Example: What would a bank with a 60% LTV maximum, loan on a 42 unit multifamily asset under contract at $117,000 per door that was appraised at $4,850,000? The lesser of:
60% of Purchase = .6 X ($117,000 per unit X 42 units) = $2,948,400
60% of Appraisal : .6 X $4,850,000 = $2,910,000.
The answer is $2,910,000. That applies to most banks currently lending practices...there are other options.
TRENDLINE: a year ago the internet was rife with commercial multifamily loans with 90 -95% LTV's...those are yet another victim of the lending crisis. For most purchases now banks want a minimum of 25% down (75% LTV) but many require 40% down (60% LTV). I'm working with a lender on a multifamily loan right now that is requesting an additional down payment to be submitted that will bring my client's effective down payment to 51% (49% LTV.) Stricter LTV requirements are probably here to stay...at least for awhile. But to those that think the forces that caused this change are permanent, please remember that $6 trillion bucks of market value was lost when the tech bubble burst...but only a few years later the DJ not only recovered...but went well past the pre-bubble highs. The recent downturn has again wiped those gains out...but I long ago transferred my 401K and stocks into a self directed program with checkbook control so that I can focus on Real Estate.
In the interest of full disclosure...while I wish LTV's were lower...I'm definitely not a fan of extremely high LTV loans. Remember that as the LTV rises resources available to make it through difficulties diminish. As banks have become more risk adverse they are requiring those taking out loans to have more "skin in the game." They want committed investors. Think of it this way: A buyer of a $1,000,000 property who puts down 5% ($50,000) often is creating a no cash flowing deal with no funded reserves. If the economy in that area goes soft and rents drop $50 per month he's going to have a "Cash Call" every month. Then he stops maintaining his property and stops making full payments. This creates a distressed property that lowers values of competing properties. If that same property had a 30 or 40% LTV loan the debt service would be less, making it possible to weather the storm better.
I mentioned previously that there are other options...among them are HUD Loans...which I'll cover in a future post.
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