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Steve Monroe: HUD had an incredible year in 2012, it was a record year for the 232 lending program for skilled nursing/assisted living. Len Lucas of Love Funding has been working on HUD loans for quite a while; he has a lot of experience with it.
Len, you do a lot of FHA lending, obviously. If a buyer is buying a turnaround property, how long should they wait to refinance it if they’re going with HUD? Or should they take it to HUD right away and do the substantial rehab-type loan?
Len Lucas: I don’t know where you’re getting your questions from, but that’s a good question. And the answer to that question is not an easy one. It depends upon what the borrower is most sensitive to—rate versus leverage. Today rates are low and to go direct to HUD would get you a low rate. However, it’s at a cost of leverage. And the situation is such that the HUD acquisition refinance 223(f) program is not a forward-looking program. And to take advantage of that program on a turnaround, you want to wait until your property stabilizes.
So you’re going to spend a period of time while you get it stabilized and you want to get to that T12 [trailing 12 months] number. Because T12 is the financial number that HUD keys in on. So you’re going to spend time getting to the T12. We look at your trailing 12 income expense and we start from there in determining what the value is of the property so that we can go down to the loan size.
So, you have to wait in that sense to get there and then you face the crossroads of, I’ve increased the value of my property, okay? Do I want to go right to HUD today and only finance the existing debt, which may be a lower leverage because of the value that you put on the property since you bought it? Or, do I want to take some of that cash out? If you choose that you want to take some cash out from the value you’ve created, HUD’s not going to do that. So you need to go to a non-HUD lender, do your cashout refinance, then wait another two years before you go back to HUD.