Case study: closing an appraisal gap with a short second, and what it actually cost
The mechanics of an appraisal gap closed with bridge financing are worth walking through with real numbers, because they explain the kind of thing a lot of new investors ask about before they have seen one happen. Say a 4 unit is under contract at 340k in a modest neighborhood, all four occupied, rents under market by about 15%. The lender is doing 75% LTV on a DSCR loan, so the expected debt is 255k, requiring roughly 85k down plus about 9k of closing costs. Then the appraisal comes back at 328k instead of 340k. Since LTV applies to the lesser of price or appraised value, the loan drops to 246k. If the seller will not come down, the gap widens from 26k to 38k on a deal the buyer still wants to close. A local investor doing small seconds can sometimes bridge that gap: 30k, 12% interest only monthly, 2 points, 9 month term. The senior lender's written consent to the second lien is often the easier part than expected, since many DSCR lenders allow it as long as combined LTV still passes their test and the second is fully subordinated on their form. At roughly 84% combined LTV of appraised value, that kind of structure can clear underwriting within days. The part that tends to nearly break these deals is the exit. If the plan is to bring under-market units up to market at turnover and refinance around month 7 or 8, but only one unit turns on schedule, the operator can hit the maturity date of the second without enough refinance proceeds to clear both liens, especially with no extension right built into the note. Asking for that extension right during negotiation and dropping it to close faster is a common and costly mistake. What often saves a deal like this is a later turn: a third unit that turns and re-leases meaningfully above the old rent can move the refinance number enough to close within a couple of extra months, provided the second lienholder gets called early with documentation rather than late with an apology. On a 30k gap loan like this, total cost often runs in the range of 3,000 to 4,000 dollars in points, interest, and any extension fee, against a building that is now producing several hundred dollars a month over debt service once the turns complete. The lesson worth keeping: call the lender early with real numbers, and never sign a short second without a pre-priced extension built into the note from day one.
