Investors and Borrowers: Are You Prepared? Want to Save Time and Headaches?
Fellow Investors and Friends,
Are you tired of looking around for lenders and searching for money? Tired of all the joker-brokers and getting jerked around? Have you been made promises that were not kept? If you're like most people, the answer is 'yes.' But, in my humble opinion, it is time for a reality check. For those of you looking for capital, the below should be a big eye-opener for you. If not, hopefully I can help you save time and frustration with lenders.
As a capital consultant/advisor, I have seen all the nonsense from both sides (the borrower and the lender). So in this post, I hope to point out some things that can help smooth things out a little.
Almost everyone who approaches me for financing are inexperienced or unprepared. Yes, even investors with experience (according to their claims) are not prepared. Here is a short list of mistakes (but not necessarily in order of importance)
The first mistake: Most investors will go to their local bank and get shot down on their loan request. Why? They try to sell the bankers their dream. Bankers on the other hand, only want to know how much ROI they will get if they loan you the money. You are approaching the wrong source for financing. Poor credit, no skin in the game ... will disqualify you 100% of the time. That is one thing I can guarantee.
The second mistake: 99.9% of all investors have no idea what their FICO/credit scores are. 99.9% of all lenders will want to see a credit report. While scores may or may not be an issue, they will take issue with recent bk's, collections, liens, etc. This past summer I had a client who wanted to buy out his two partners. He needed $50,000. There were 3 lenders interested in funding him until they saw his credit report. He had a 580 middle FICO. Upon further digging, we saw that he had not paid child support since he got divorced 2 years ago ... you guessed it ... it was a deal-killer. Think like a banker here: what is your risk? Would you lend money to a relative or close friend with the same issues? Be honest.
The third mistake: Borrowers/Investors need to get their financing in place first before going for money. Do you have a recent copy of your credit report? Do you have rent rolls or lease agreements on the property you are buying? Do you have money to pay for an appraisal or can you get the seller to pay for it? Many lenders want to see 3 years of tax returns on the borrower: do you have this available in PDF format to submit upon request? How about 3 years worth of financials for the subject property? Personal Financial Statement (PFS)? 3 Months of bank statements? My advice is to get all that in place first. Then, when you approach me for a loan, I can move things super quick.
The fourth mistake: Borrowers try to dictate rates and terms. A big no-no. Remember that he who has the gold, makes the rules. It never ceases to amaze me how buyers/borrowers ask for low rates, long terms, and no or little points. It seems that the more challenged they are (credit, liquid cash, and other qualifications) the more demanding they are. But ... have you ever found a lender and capital? Do you know of anyone who has? I don't. I'd love to hear from you if you do know.
The fifth mistake: This is related to mistake #1; do you know what class of borrower you are? There are 3 general classes (and a fourth I made up):
Class A Borrower: 730+ FICO, has 20% liquid cash in the bank for his/her purchase. Established relationship with local bank. This person can get money from the bank.
Class B Borrower: 680 ~ 729 FICO. A little challenged on the credit. May have a 30-day late that was paid off six months ago but still showing on credit reports. May have 20% ~ 50% in liquid cash to contribute to purchase. Hedge funds and private equity groups may be interested. Their rates and terms are between banks and hard money (6% to 10% interest | 1 to 10 year terms with 25 or 30 year amortization)
Class C Borrower: 600 ~ 679 FICO. May or may not have liquid cash to contribute. If you're in this category, expect hard money rates and terms (9% to 18% interest | 1 to 5 year terms)
Class D Borrower: below 600 FICO, no money, no skin in the game, only passion. Sorry, but don't waste your time or anyone else's because you'll never find money unless you have a rich and loving relative willing to help out with cash (not as a co-signer). Sorry to be so blunt here.
On the subject of upfront fees: be careful. Some brokers make money on these upfront fees. They may or may not be legitimate (I'll save that for another article). If you are interested in working with them to raise capital, I would suggest you ask them the following question:
1. How do I do due diligence on you?
2. Do you have any references?
3. How long have you been in the business?
4. Do you offer money back guarantee or at least a partial refund?
5. Are you a direct lender or a broker/advisor?
Listen and observe how they answer. If they hesitate or make up answers that are not reasonable, you drop them and move on. Fees that are legitimate are third-party fees: appraisal, inspection, environmental (around $5,000 total for commercial RE properties). If the lender insists on ordering an appraisal, make sure you meet the appraiser at the subject property and pay him directly. Ask for a copy of the appraisal when he's done. Negotiate with you lender on this and be adamant that you don't want to be ripped-off. Be prepared to pay these fees. The lender is NOT paying for it. You could walk away from the property if it doesn't appraise to your liking and the lender is stuck with the bill. It ain't gonna happen.
One last rule of thumb: the higher the LTV you ask for, the more you're going to pay in points and interest - in other words, hard money-like rates and terms. There is no such thing as 100% financing. There are lenders that claim that and I do work with one that does (55% LTV by lender, seller allowed to carry 45% for a 100% CLTV) but it is one year at 15% interest only. First lien position. No silent seconds with seller - must have a legit contract and escrowed. Proceed with caution. Do a Google search on the name or company. Search sites like: www.ripoffreport.com, the State's Banking Division, BBB, to name a few. Be cautious of lenders/brokers with generic/free email accounts, i.e. gmail, yahoo.com, etc. Check to see if they have a website. If they do, is their contact information (street address, phone numbers, email, cell phone, etc) visible?
I hope this helps you with your search for funding. It's a dangerous and wicked world out there with commercial investing. Residential also to a certain degree as you are protected by RESPA laws, with commercial, you are not.
If you have any questions or comments, feel free to reach out to me at: info@amcapitalsource.com. Our website is: www.amcapitalsource.com
All the best to you,
Andrew
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