I talk with fix & flip professionals, business owners and real estate investors every day. They all have goals that require funding of some sort. It is very infrequent for them to come to me with their ducks already in a row. That's fine; I can work with them to get them there, but I'm often surprised that they're surprised at what will be needed to fund their deal.
So, in the interest of a more educated and successful borrower, here's what's up:
Understand the difference between "guidelines" and "requirements".
Guidelines vary. Requirements do not. Let me explain:
Guidelines include things such as LTV, interest rates, points, the type of collateral the lender will accept, the relative importance of your credit score, income, etc. SBA guidelines are very different than hard money guidelines.
Requirements are the various pieces of information that comprise a complete loan package. Some excellent information is available here, but what follows is a description of what you will need to provide ANY lender on ANY real estate transaction:
- Executive Summary - This should include a brief description of what you're trying to accomplish (what will the funds be used for and how will that move your business forward). It should also include some information about your background and experience; this tells the lender that you are capable of using their money to make a profit.
- Personal Financial Statement - This is the item people struggle and hesitate with, but it has to be done. The lender will absolutely need to have a clear picture of your financial standing. Include a list of ALL assets such as life insurance, bank accounts, retirement plans and details about property you currently own, even if it's only your personal residence. Your net worth is a factor every time! (Remember, different guidelines will place different importance on that, but the lender must still know where you're at financially. It's a basic.)
- Credit- Go to creditera.com or creditchecktotal.com or whatever credit-reporting site you prefer. Find out. Get real. Whatever it is, it is. Once again, guidelines will vary greatly but every lender will expect to have that question answered. True, some loan programs will say "no credit check required". Those are few and typically expensive, but even those lenders will want to know what the score is - they're just not going to insist on verifying it. That last statement applies also to "stated-income" or "no income verification" products. Even in that case you have to state it, you see.
- Property - This one is the easiest for most of you, because it's what you're focused on. Know the current value, the after repair value (ARV) and have a detailed repair/rehab budget, if applicable. If it's a cash-flowing property, you'll need to provide details on the leases. Have a basic cash flow summary that shows gross scheduled rents (GSI), net operating income (NOI) and operating expenses. It's also a good idea to show a cap rate and the debt service coverage ratio (DSCR).
- Exit Strategy - Provide a brief explanation of how you will pay the loan back. Buy and flip? Buy and hold? Two or three sentences is usually enough and essentially summarizes why the lender should give you the money.
Additional supporting documents such as tax returns or bank statements may be required (again, depending on guidelines). Ask your lender what will be required based on the program you're applying for and get to work on putting them together. This will save both time and frustration for you and the lender.
Be a good real estate scout. Be prepared. If you need help or advice on how to package something, just ask! Most good lenders welcome it - after all, it's in their best interest as well as yours!
As always, if you need funding - or just have questions, feel free to reach out to me.