Gain some insights about rehabbing and flipping properties in Philadelphia. Rocky Butani interviewed John Santilli, President of Rehab Financial Group, a local Philly lender based in Rosemont, PA. Watch the video below or read the transcript below.
Rocky Butani:
So Rehab Financial Group lends in a few states in the Northeast and other parts of the country. But today, let’s talk about Pennsylvania and Philadelphia in particular. What are some of the trends you’re seeing with hard money lending and rehab investing in your area?
John Santilli:
Philadelphia has been our backyard from the very beginning. It’s our core state, it’s our core market. So I feel like we have a great stronghold on what’s going on in the marketplace, what the investors are looking for, what they’re experiencing. I will say to you that it is more just like what everybody else is experiencing in that housing availability is still tough across the country and specifically within Philadelphia. But I think the great thing within Philadelphia is that you just see continual sprawl and continual growth in the inner city marketplace to where you’re actually seeing some of those neighborhoods that have been depressed for some time on the fringe of some of the better neighborhoods just really growing. I mean, they’re getting rehabbed, they’re getting purchased, they’re getting built up. And it’s almost contagious to the point where you see one property on the block get fixed up and then the rest of the properties on the block start getting fixed up. So whether it’s near a lot of the colleges that we have in the local market or whether it’s just expanding the footprint of where people are trying to move into the city and the growth is just spreading out within the city. So we see a lot of homes that weren’t touched years ago are getting attacked at this point in time.
Rocky Butani:
Could you give us some examples of some of the neighborhoods and cities where you’re seeing a lot of this activity?
John Santilli:
It’s always near the colleges that we see the largest growth. So Temple University area, whether it’s been Temple University or University City near University of Pennsylvania or Drexel, it’s continually growing. So that Fairmount section of the city, the Temple University area of the city, even West Philadelphia is growing a lot, with a lot of the work being done in those areas. These are good neighborhoods with just sporadic houses that need to be fixed up or blocks that just haven’t been touched for a long period of time.
Rocky Butani:
And are you seeing a lot of expansion outside of the city?
John Santilli:
Where you can find the properties, the answer is Yes. So from our office area where we’re right outside of Villanova, Rosemont, “on the main line” is what they refer to it. We are within a mile two of City Line Avenue, and you see that spread coming right into this area as well. It’s harder to find houses, but the houses that, every year the elderly population move on, is where you’re really seeing the best opportunities and growth. So anything surrounding the city, just outside of the city area footprint, you’re definitely seeing those houses get attacked really fast and where the lay consumer is not willing to go near that house, the investors are going into those houses, rehabbing and really taking advantage of the market.
Rocky Butani:
And are a lot of your borrowers flipping the houses or are they going with the rental strategy to hold it for a long term?
John Santilli:
We’re seeing a split. In the past, what we saw was probably close to 70% to 80% flips. Now because of the demand on rents and the affordability of houses with the high interest rates, we’re seeing more rentals than ever, and creative rentals at that.
Rocky Butani:
What do you mean by creative rentals?
John Santilli:
People are maximizing the space as much as possible. We are seeing that people are taking out some of the common spaces, making more bedrooms for some of the smaller houses that they’re trying to rent out. Or if it’s multifamily, they’re creating common areas for the property to have more of a dorm-type setting. Where some of these younger populations, they’re not able to go out and buy a property right away. The affordability is really tough. They’re used to living in a dorm type atmosphere. But they’re now grabbing these multifamily complexes where they have like the ground level is a gym, a common space, a TV watching area, to where they’re really trying to take advantage of that and create a homestyle lifestyle difference.
Rocky Butani:
And in Philadelphia, just generally, is it fairly easy to get permits and deal with the city when you’re rehabbing properties, or does that typically take a long time for investors?
John Santilli:
The answer is No. It’s just like every other city. Permits are definitely a challenge. You need to know the landscape. You need to have an experienced contractor to really help you through that landscape. With Rehab Financial, we do permit people without experience, but we really throw the caution flag up when you have extensive repairs going into properties. And more than ever, you’re looking at extensive repairs, so we help you do a good job of vetting some of your contractors during that process.
Rocky Butani:
So if there are all these older properties and they just need a ton of work, are most of your projects a heavy rehab versus a light cosmetic rehab?
John Santilli:
The average rehab today has gone up at least by 25% to 35%. and that’s just been within the last three to four years. They’re all heavy rehabs at this point in time. I don’t see many light rehabs unless you are passing on a generational type property or something like that. So everything seems to be extensive at this point and you really need to know what you’re getting into.
Rocky Butani:
How about outside of the Philadelphia metro area? Are you doing a lot of lending in Scranton or Harrisburg or Pittsburgh?
John Santilli:
So we have a stronghold on Philadelphia specifically. We’ve been here for so long. We are recognized by so many that the Philadelphia area is where we have the greatest footprint. Wilkes-Barre seems to be a good area to where people are really doing a lot of rebuilding in that area. Scranton is still touch and go. I know that Scranton has its own economic issues. Pittsburgh is still a great area for us and we do a lot of work in the Pittsburgh area as well. So I would say those are probably the primary areas. The Poconos definitely has been a growth area as well. But even the middle of the state, we get a lot of requests throughout the middle of the state, that we’ll see pop up from here and there. And we don’t have necessarily restrictions on the more rural areas, but we just want to make sure that the appraised values and the experience are commensurate with the project.
Rocky Butani:
What are your lending parameters and requirements?
John Santilli:
So we’ve evolved to just like the rest of the industry has evolved, but at the core Rehab Financial has done the same product from the very beginning, which is 100% financing. That’s what our niche is. It’s 100 % of the purchase, 100 % of the rehab. We have three tiers after that of 65% loan-to-after-repair value, that is for the 0 to 3 projects experience. 3+ experience opens the doors to 70% and 75% of the after repair value. The 75 % is really reserved for those with a higher average loan size, and the margin of error is a little bit looser on the whole thing. But our niche product is going to be fix and flip, buy and hold, the interim short-term rehab up to 12 months. And I’m going to be 100% of the purchase, 100% of the rehab, no down payment. So long as you’re up to the 65%, 70% or 75%, whatever you qualify for. We also do ground up financing as well. We’ve evolved into that over the past three years. And that really has opened a lot of doors for some individuals as well, because there is still property and land available in this area. So for ground up financing, we do require a 30% down payment if there’s going to be land acquisition, with some minimum requirements on what that acquisition dollar amount is. So in other words, if you have a property that you’re purchasing for less than $20,000, we may ask you to buy that all on your own and then we’ll handle all of the renovations or construction on that side, 100% of that going up to 65% or 70% of the as completed value, depending upon what your experience is.
Rocky Butani:
So with 100% financing, there’s got to be a catch. So what are the actual requirements? Do investors need to have a ton of cash in the bank? What are the credit score requirements?
John Santilli:
No catch. Just a little bit more work. With 100% financing, we are not doing what your standard lender does – let’s take a look at your assets, take a look at what your experience is and take a look at what your credit score is. We’re going to take a look at cash flow and income. And I utilize that together because most investors look at this and they say “nobody else may ask me for income. I don’t show a lot of income, I do the fix and flip, I write everything off, I pay my Uncle Sam taxes, but I write off as much as I possibly can.” That’s why we’re gonna be taking a look at the cash flow. So as long as you have the cash flow within your bank statements, matching that up with your gross revenues, we will approve the loans as long as you have that disposable income to pay for the loan payments.
Rocky Butani:
So you just want to see that investors have enough money to make the monthly payments.
John Santilli:
Correct, it really comes down to showing us your tax returns and your bank statements. If you’re a W-2 wage earner, it’s very easy, but for those that are self-employed, we understand it. It’s the whole reason why these programs were developed. If you’re self-employed, not showing a lot of bottom line income, show us more on your bank statements and we’ll be able to prove your loan.
Rocky Butani:
Do you require an interest reserve on your loans?
John Santilli:
All of our loans at Rehab Financial require at least three months interest reserves. Our interest is drawn on rehab amounts greater than $100,000, but we do collect three months interest reserves upfront.
Rocky Butani:
And how about credit scores?
John Santilli:
We go down to 620 FICO score. We take the higher middle score of the collective borrowers. And most of our credit scores wind up being above 700 as a result of taking the higher score of the collective borrowers. And very rarely do I see many below that 660 score. So the fact is we do go down to 620. We write loans below that 660 mark for the majority of our borrowers because we’re taking that the higher of the middle scores across the collective borrowers are above 700.
Rocky Butani:
And collective borrowers meaning where there’s a group of investors, let’s say two or three investors that are partnered to work on rehabbing houses?
John Santilli:
That is correct. Most of these LLCs carry two or three partners. As long as that LLC is established, and you’ve been a team for a while. We take the higher scores.
Rocky Butani:
You mentioned that you will lend to real estate investors that don’t have any experience with rehab projects, but are there any other requirements related to that? Do they have to have some experience with real estate investing? And do they need to hire a general contractor that you have to approve?
John Santilli:
As pertains to experience levels, we deal with investors that have zero experience and ones with a lot of experience. The reality is we require zero experience to obtain any loan with us. We will cap those first-time investors all the way up to zero to two units/projects. We will require them to have smaller loan amounts at first. Lower loan amounts, lower rehab amounts, anything over $50,000, $60,000 in rehab. If you have no experience in that zero to two level (successfully completed projects), we tend to do smaller loan sizes with those folks. If their rehab budget starts to get greater than that $50,000 to $60,000, we’re going to look to try and improve the contractor along the way as well to make sure they’re utilizing somebody that’s experienced. Jumping into a project or for a do it yourself type project where you have a heavy rehab, a $100,00 rehab, we’re not going to do that unless you have a real great profile from your credit, your cashflow/income and also your assets as well. Anybody that has 3+ projects experience, the fact is that you’ve been around the block. We know that you know what you’re doing in that vein there. And there’s not a lot of restrictions or requirements that we have on those, except for the fact that if you’re looking to obtain our 75% ARV program, we are looking for you to have additional assets available, maybe additional 10% required on the assets available for that project. And that the loan amount is a bit higher as well. Typically, those are the folks that are acquiring a property that is $200,000 to $300,000 and has $200,000 to $300,000 worth of work that’s going into the property as well.
With Rehab Financial, we are absolutely different than the competition. We do 100% financing – 100% of the purchase, 100% of the rehab, no down payment. So long as it’s below that 65%, 70% or 75% ARV, depending upon what your experience is. Within the Philadelphia marketplace, this is our backyard. We’ve been lending here since 2009. We know this market almost better than anyone. And we can help a lot of those experienced and inexperienced folks save more money at the closing table than any lender out there that’s requiring any type of down payment.
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