3 Reasons to Not Hold Out for Higher LTVs, as an Investor

Property investors tend to rely on financing to acquire new properties. Financing allows them to preserve cash for more important things. But with financing comes traditional things like interest rates, terms, and loan-to-value (LTV) ratios. Specifically where LTVs are concerned, they tend to be much lower in hard money.

How much lower? It is hard to say. Salt Lake City-based hard money lender Actium Partners explains that, as private lenders, they have a lot of flexibility in determining lending policy. Theoretically, they can go as high or low as they want to with LTVs.

I did my own research and discovered that hard money LTVs tended to be 50-70%. There may be a temptation among investors to hold out for something higher. Yet doing so may be a mistake. If you are not sure why, consider these three reasons investors shouldn’t hold out for hire LTVs:

1. Losing the Deal Is a Real Possibility

Speed is a big concern in real estate investing. Investors need to be able to move quickly. If they cannot get to closing faster than the other guy, they risk the other guy stealing deals right out from underneath them. Holding out for a higher LTV could set the stage for that very thing.

Although lender policies differ in regard to LTVs, they may not differ drastically in a particular region. So an investor taking 5-7 days to dig through a large number of lenders may ultimately wind up coming to the table too late. By the time he finds a lender with an acceptable LTV, the property is already gone.

One of the big benefits of hard money is accessing capital quickly. Why throw that benefit away by holding out for a higher LTV? Sure, borrowers should shop around. But at some point, speed dictates biting the bullet and moving ahead.

2. The Motivation Might Be a Red Flag

A second reason to not hold out for a higher LTV lies in the motivation for doing so. Let us say a borrower is struggling to find an LTV higher than 65%. Limited resources has him holding out for 75-80%. Right off the bat, there could be a problem.

Limited resources are a red flag. If they are the primary motivation for seeking out a higher LTV, perhaps the buyer really isn’t in a good position to acquire that property. A better choice might be foregoing the property and looking for something less expensive.

Remember that lenders utilize LTVs to manage risk. Requesting a higher LTV is equal to asking a lender to shoulder more of the risk. A lender will think twice about such a proposition. It could be enough to cause the lender to walk away.

3. The Risk of Over Extension

Finally, a borrower might hold out for a higher LTV so that he spends less cash on obtaining a new property. The idea is to preserve some cash to go after a second property. This seems reasonable on the surface, but it could lead to a borrower overextending himself. He could wind up taking on too big a debt load, a debt loan that could severely damage his financial situation if he’s unable to keep up.

As I see it, LTVs are both risk management tools and guideposts for investors. On rare occasions it might be appropriate to hold out for a higher LTV. But for the most part, going with the best offer after comparing several loans is more reasonable. Working within the system allows borrowers to maximize hard money’s benefits.