Why Can’t the Equity Fund the Down Payment?

I got a question from a subscriber that I want to share with everyone. Because I get this particular question a lot.

Question

We’re getting ready to contract on a commercial office space. We’ve got a seller who is motivated and  holds clear title. Unfortunately, the listing broker overpriced the property originally, and this has created some psychological barriers. He had to drop the price over 200K in recent months, and they still need to make concessions on the roof and TI.

IF the property appraises (by an appraiser engaged by our lender) at an amount sufficient to put us into the project at 75-80% of LTV, why does the lender still want 10% down where the collateralization is more than sufficient and it’s a portfolio loan. Is there anything we can do to keep the “down payment” money in our pocket?

In a scenario where the accepted offer price is low and the appraisal value higher (to provide a 75%-80% LTV) why force the 10% down rule? Lenders tell us “that’s just what’s required.” Based on what?

Answer

Ahhh, the old, why can’t we use the equity in the property to fund the down payment issue. I know, it seems that we real estate investors get punished for getting a great deal but the answer is simple.

Skin in the game.

If it’s 100% financing, the lender’s risk models show huge default across the board. With even 10% down, the default percentages decrease dramatically.

Lenders that I work with always say, “we’re a bank not a partner” and that’s true. Lenders that will consider 100% LTC (loan to cost) are lenders that will make it a participation deal – they’ll take a % of the cash flow and equity and it’s ugly. If you’re going that route, it’s way better to raise the down payment yourself.