In this vlog post I discuss the concept of 'Lending Value' because in my days at CMHC as a multifamily underwriter I remember many an investor being stumped when they found out from their banker they were not getting the amount of financing they thought they could get.  

Very often that was because the lending value used by the bank, and more than not by CMHC, was not the same as the market value or the purchase price.

First let's define 'Lending Value'.  

For mortgage purposes, lending value is defined as the lesser of appraised value (by formal appraiser) and the sale price.

Banks and CMHC use the lending value to determine what portion of this lending value they will give you in financing. This portion is called the loan amount. The percentage of the lending value you get in financing is called loan-to-value. 

Not getting the expected amount of financing from your banker can be dramatic as this means investors have to come up with a larger down payment in order to be able to purchase the apartment building. Sometimes, that can be a sour surprise if you're like me and you raise capital privately.

This is mostly a problem when applying for CMHC-insured financing as CMHC tends to use mostly a lending value that is lower than market value as a means to mitigate their risk.

In fact, in their underwriting guidelines CMHC indicates the lending value will be "determined by CMHC" for buildings of over 5 units.  CMHC does not even require borrowers to provide an appraisal precisely because it does not want to be bound to use market value as the lending value.

Since the spring 2017, CMHC is said to try to move closer to market value when determining the lending value.

My personal opinion: don't count on it and prepare accordingly! CMHC will always lowball the value of the property!

Conventional lenders (non-CMHC insured financing), on the other hand, will generally use market value as the lending value in order to determine the loan amount. So you'll need to get a recent appraisal in support of that lending value.

The bottom line is that you must be aware of this when you seek financing for your apartment buildings. In order to better protect yourself against such negatives surprises you must do your homework first and get to know market values well in your area for the type and size of property you're looking for.

If you're applying for CMHC-insured financing, you might consider obtaining an appraisal, despite the fact CMHC does not fomally require it, if you feel the lending value CMHC is using to determine your loan amount is too low. This way you can use the appraisal with its current market value in support of the landing value and somewhat force CMHC's hand.

I have used this strategy with CMHC with success just in the last couple of months on a refinance application.

P.S.

Don't forget to look into my upcoming 2.5-day workshops in Edmonton (Oct. 12-14) and Hamilton (Oct. 26-28).  The Hamilton workshop sold out last year and I expect the same to happen again this year. 

Nobody else in Canada is teaching this stuff, especially nobody with my credentials and experience. This is as hands-on of a training you can get.

Right now we have a special offer where you can get both a ticket to the live workshop and lifetime access to the online version of the live workshop.

There is no other experiential course like this in Canada for multifamily investors.

To your MF investing success!

Cheers,

Pierre-Paul