Borrowed 30k to cover an appraisal gap, which cost me 2,700

Question I would have been too embarrassed to ask a year ago. Why did the lender's loan drop when the appraisal dropped, if the price was already agreed at 340k? I assumed the contract price was the number that mattered.

@compass because they lend against the lower of the two, so a low appraisal moves your cash requirement even when nothing about the property changed. It's the single most common reason people need gap money at the last minute.

@thicket the 2,700 of interest on 30k over 11 months reads low to me. At 12% interest only that's 300 a month, so 11 months is 3,300. Did he accrue some of it or did you pay down principal?

The four day consent turnaround is the part that surprised me. I'd been told most permanent lenders flatly refuse subordinate financing.

Two mechanisms in this post are worth separating, because they get conflated constantly.

The first is how a lender sizes a loan. Most size to the lesser of purchase price or appraised value, so an appraisal below contract increases the borrower's cash requirement without changing anything about the property. That is why appraisal gaps generate demand for short term junior capital.

The second is combined loan to value. When a permanent lender permits a subordinate lien, the test is usually applied across all debt secured by the property, not just their own. Whether a lender allows subordinate financing at all, and at what combined threshold, varies by lender and by loan product, and it can vary by state where the security instrument or recording practice differs. It needs to be confirmed in writing before the second is signed, because recording a lien in violation of a senior loan covenant can itself be an event of default.

On @thatch's arithmetic question, the figures in the post work out to roughly 3,300 of interest at a full 12% for eleven months on 30,000, so either something was paid down or part of the term ran at a different balance.

The structural lesson in the post is the extension. A junior note maturing before the exit event is realistically expected leaves the borrower with no options and the lender with a position it probably cannot enforce cheaply. Pricing an extension at signing, whether as a flat fee or as points, costs nothing when it isn't used. Whether a given lender will grant one is a negotiation, and it is far easier before funding than at maturity.

Betting the refi on tenant turnover you don't control is the part that sounds easy in the retelling. One unit turned when you needed two, and the fix was a third unit turning on its own schedule. If nobody moves for eleven months you're at maturity on a 30k second with 246k of senior debt in front of it and no cash. What was your plan if that happened?

1,395 against 1,140 on turnover is a 22% jump. Was that market or did you put money into the unit?

480 a month over debt service on a 4 unit after 11 months of this. Is that before or after you set aside for repairs and vacancy?

The boring alternative was walking away from a deal where the appraisal came in short, and I notice nobody has said that. Not saying it was the right call, but 84% combined LTV on a building whose plan depends on tenants moving out is a fair distance from what I'd sign.

@keystone's carryability test is the cleanest framing in the thread and I'm stealing it for the construction seconds I look at, where there's no rent at all during the term. If nothing carries the payment, the reserve has to, and that reserve is part of the loan amount whether anyone calls it that or not.