Learn About Collateral and How It Affects Loan Approval
Today collateral it’s more important than ever!
Six months ago collateral was something the banks were glad to have, today it is mandatory. More and more of our lenders are becoming cash flow as well as collateral based lenders.
What does that mean to you?
It means that not only do you have to make sure that you can support the debt service of your project, the subject property (if this is a real estate transaction) has to appraise at the purchase price, but oftentimes banks are now asking for additional collateral.
So now that we know that additional collateral is needed, let’s look at collateral in light of three types of common transactions. The first transaction would be for the purchase of a business that does not include any real estate. The second scenario is for the purchase of a business that also includes real estate. In a third example we will look at the acquisition of a commercial investment property.
For the Business Acquisition there is no real estate collateral from the inception, the business is being sold as a leasehold estate for the remainder of the existing lease. Today more than ever the lenders are going to WANT collateral to secure their lending position. All of the business assets will be pledged for the loan at the fair market liquidation value as the first form of collateral.
If for example the business being sold is one that is industrial based then there will be manufacturing equipment which could be used to support the needed collateral. Know that even if the equipment is not sufficient to support the loan by itself the lenders are going to have a lien against all the FFE (Furniture Fixtures and Equipment) that the business has. The lien they file is a UCC1 Filing Statement… more about this in our book GET Your Loan Closed!.
Read our book GET Your Loan Closed!. to find out answers to solving the above question regarding no-collateral
Our second scenario… business with real estate
The lender will appraise the property and if the appraisal of the property comes in at the sales price there will not be a need for any additional collateral for the purchase of the real estate. However, because the business is being sold, as well, there may be additional collateral for the business purchase. Most likely the FFE can cover this as well as the real estate building. However in today’s economic arena some lenders, not all, are asking for almost 100% collateral coverage and then additional collateral for the business acquisition purchase would be needed.
Find out about all the misconceptions about purchase versus appraisal as it relates to collateral in GET Your Loan Closed!.
Commercial investments are looked at differently; they are based on the CAP rate or the capitalization rate, as well as the debt service coverage ratio as discussed in previous white reports. Most commercial investments will not require any additional collateral, unless the debt service is not being covered. In this case a lender may offer the potential borrower the ability to cross-collateralize the property with another one they may already own. The cross-collateralization protects the lender in case of default they now have two properties which together should be worth what the property would be sold at on the open market.
Lately lenders are getting away from cross-collateralization because they want to see deals stand on their own merits.
Now that you’re aware of collateral requirements how do you meet them?
First and foremost for scenarios one and two, a lender will hire an appraiser of the real estate assets as well as an appraiser of the business assets to determine the exposure of the borrower. If the borrower has a good steady income and low debt service obligations that may be sufficient without the need for additional collateral. But the more the borrower gets away from being the perfect applicant the more the lenders are going to want to secure their investment with additional collateral.
More on ways of meeting collateral requirements in GET Your Loan Closed!.
LEARN THE TRUTH ABOUT APPRAISALS
What does the Appraisal process have to do with loan approval?
Everything…ESPECIALLY TODAY!
As lenders become more and more cautious about lending their depositors dollars they are looking for more and more security. Security translates to collateral, collateral translates to security, and they are now one and the same.
An appraisal will be needed to guarantee the bank that the borrower will provide the bank with adequate collateral/security.
The appraisal can be for the subject property, or the appraisal can be for the collateral, or for both. As the appraisals for subject properties are coming in lower than the purchase prices even real estate deals are still requiring additional collateral.
How can that be?
The answer is because of bank foreclosures, short sales, and the sub-prime debacle.
What does that have to do with a good solid deal? EVERYTHING!
Since the banks may have to in the future take back the property as mentioned in the last white report, the bank needs to know they have enough security behind the deal.
With this report we are not going to delve into the different types of appraisal methods, such as the three ways of appraising property: comparables, market approach and the income approach. We are also not going to discuss the highest and best use rule other than to say that a property should be appraised for its ultimate use, not necessarily the use that it is today.
For example a lot that can be approved for neighborhood commercial real estate should be appraised for commercial usage rather than as a residential lot if the property can be re-zoned. More on the process in GET Your Loan Closed!.
The appraisal process is a very complicated science with lots of moving variables. Appraisers find comparable properties then either add or deduct value as the subject property is evaluated to the comparables. The appraiser based on what the market is dictating determines the value added or deducted. If the market is stronger then the additions will be higher, if the market is tending to be lower then the additions will not be as high, or maybe not at all. In a declining market properties that are not as strong and the comparables will have even higher deductions as well.
The appraiser will look at all plans and drawings to determine what the future use of the property is for clients that are going through the construction process.
As I am not an expert in the appraisal process this white report will be cut short, the purpose of this report was to identify potential issues and to point you in the right direction as it relates to the process.
Most importantly for a commercial loan do not order the appraisal yourself! If you need to have a value before you enter into a purchase agreement there are two approaches you can take.
1. Hire an appraiser to do a simple appraisal to get a value, do not get the full blown report as it will cost you thousands for a commercial appraisal, and the likelihood that the bank will accept the appraisal is not very high.
2. For the second point download a copy of our book today or order at hard copy at GET Your Loan Closed!.
For more on the different types of appraisal and more comprehensive examples order our book GET Your Loan Closed!.
Understand How Cash Flow is the Number One Determinant if your Loan will be Approved
Our next concept that needs to be understood is cash flow.
NO matter what your credit score, no matter what experience you have running the same business or investment piece of property, no matter how much money you have to put down for the purchase, no matter how many liquid assets you control, no matter how much collateral you can muster, it all means NOTHING if there is no supporting cash flow from the project to meet the expected debt service for the acquisition in question.
Today more than ever lenders are looking for supporting cash flow from the project. When cash flow is lacking it becomes extremely difficult to finance the new acquisition; even with income coming from additional properties lenders are still reluctant to lend.
Why is this, the case?
If the lender has to take a property back they want to be damn sure that the property is going to pay for itself. They don’t want another non-performing asset on their books. When a lender takes back a property it is classified as performing or non-performing. It remains non-performing until the borrower can support the debt service and starts paying on the mortgage again. The other option is that the cash flow from the rents and all auxiliary income collected can adequately cover the loan payments.
So we are back to the same position, that of cash flow.
What is cash flow?
Cash flow is defined differently depending on what you are acquiring. For example if you are buying a business the cash flow is more aptly called Sellers Discretionary Earnings (money which is left at the end of the month for the seller after all debt service and other expenditures are covered). Actually, business brokers use SDE to determine the selling price of a business, but more about that latter.
Our book, GET Your Loan Closed! spends about half a chapter on the valuation of a business as it relates to Sellers Discretionary Cash Flow. Get it here (insert link)
If you are purchasing a piece of real estate, then cash flow is that money which is left over after you deduct all your debt service and operating expenses for the property. Once that net amount is determined the lender will allow you a certain percentage of the available cash flow for the new loan. The total dollars that you are lent is ascertained by the calculation known as debt service coverage ratio.
Debt service Coverage ratio is the new loan’s expected annual debt service divided by the current yearly net cash flow. Today more than ever lenders want to know if you have more cash available then is projected to meet your debt obligation.
Another point to ask yourself is…
WHY WOULD YOU BUY A PROPERTY THAT IS NOT CASH FLOWING?
Much more on ROI including examples and calculations in our 95 page color book GET Your Loan Closed!
Order it today.
We are currently working with a client that is purchasing a piece of property knowing today that it is currently a poor investment, but they have information a major thoroughfare will be built through the town, so they are betting on the future value of the property even though today the economics don’t make sense.
So how is cash flow really calculated from the lenders point of view? The lender will calculate cash flow very differently than the prospective borrower. I cannot tell you how many times I have a client demonstrate to me that the project is cash flowing at a 1:1.25 ratio, and the lender comes back with their calculations at 1:105, or even less.
Why such a discrepancy? Who is Right?
The reason for the discrepancy is the lender will add in all expenditures and apply them to the bottom line. The key term in the last sentence is all. All means expenses that don’t appear today on the seller’s cash flow analysis, income and expense statement or even in tax returns.
How can these expenses be applied when they do not appear anywhere?
Again the reason is lenders always look at the worst-case scenario, which is, they have to take the property back due to foreclosure. If the lender has to take the property back they will have marketing, leasing and management expenses to run the property. Most borrowers will reduce or totally eliminate these costs. The buyer’s rational is they are going to do the leasing, and marketing of the property. Borrowers also assert they can perform these duties for a lot less than the cost of a professional manager or management company. Expenses are thoroughly analyzed in , GET Your Loan Closed!!
I’m not telling you this to scare you, but to prepare you.
As I mentioned previously Cash Flow is King, We want to make sure that you are accounting for all expenditures. By the way any extraordinary expenses such as a new roof or one time only equipment purchases are not deducted against cash flow as they are one-time non-recurring expenses.
So in conclusion to this white report, you must understand the entire cash flow picture. In our book, GET Your Loan Closed! we delve into different cash flow models with much greater detail and we also offer examples of calculations, tax returns, rent rolls etc, all to make you a more knowledgeable buyer of property and borrower of funds.
Understand How Your Credit Score Will Influence the Underwriting Approval Process
Numbers, Numbers, Numbers, what do they all mean?
Your credit score, as you are most likely aware, will be a very important factor during the underwriting process and ultimate approval for your loan. But once again we are ahead of ourselves.
So let’s examine first what is your credit score and how it is calculated. Then we will determine what, if any control you have of improving your score. For a much more in-depth study on credit scoring please refer to our book GET Your Loan Closed! which you can download now.
Fair Isaac or FICO scores are the key to the lock that must be opened before any bank will entertain a loan for you. Before the bank decides on what the loan terms are (which they base on their “risk”), lenders want to know two important things about you. “Do you have the financial capacity monthly to make payments on the loan and what is your willingness to repay the bank during the term of the loan?”
For the first question, the bank calculates your income-to-debt obligation ratio; more on this ratio in an upcoming white report.
For your willingness to pay back the loan your credit report and score is consulted.
What is credit scoring?
Credit scoring is a system creditors use to help determine whether or not to extend you credit.
Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the opening date of the extension of credit is collected. All this information and more is gathered from reviewing your loan application and verified by the contents of your credit report. Much much more in GET Your Loan Closed!
Why is credit scoring used?
Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. The credit process treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and will vary when applied by different individuals and institutions.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they’re named after their inventor!). Your FICO score is between 350 (high risk to lender) and 850 (low risk to lender).
Credit scores only consider the data and information contained in the credit profile. They do not take into consideration other factors such as a borrower’s income, savings, down payment amount, or even demographic factors like gender, race, nationality or marital status. Credit scoring was developed as a way to consider only what was relevant to somebody’s willingness to repay the loan.
With a client’s credit score, the challenge from a lenders point of view is that it is always changing. The problem then becomes that you “pull” your credit and feel comfortable when the score shown is over 650, the minimum for many lenders to grant SBA loan approval, and the lender get a different score when they “pull” it. The reason for this divergence may be as simple as the lenders credit report is different than the “free” one you can “pull” on the internet, or there could be actual changes due to other institutions updating information to the three main credit reporting agencies; Experian, Trans Union, and Equifax. Most agencies will report credit delinquencies every thirty days. For more on reading and understanding about your credit report, download our 95 page color book, GET Your Loan Closed!
Credit analysis and the credit decision process are done in-house by the underwriter assigned to your loan by the Financial Institution. The lender is required to use appropriate and generally accepted credit analysis processes and procedures, and they must be applied consistently. Acceptable analytical measures include “credit scoring,” if the lender uses credit scoring More on the scoring in ,GET Your Loan Closed!
The one thing a lender does not want is to be surprised. I cannot stress this enough, surprises are not good for the banker or for you! They will significantly affect your likelihood of approval.
For more ideas on fixing your credit score read our 95 color page book, GET Your Loan Closed!
HOW TO SELECT THE RIGHT LENDER
The only way you will know if you chose the right lender is if your deal was closed!
So why would I prepare a white report on KNOWING how to choose the right lender?
Simply stated, it’s the “knowing” that is the important factor here; not the doing. If you know you chose the right lender then your chance of closing the loan is significantly greater. The relationship and rapport that you build up with your lender really does mean a lot.
You must be able to talk to your lender and express what deal terms and conditions are important. Next, your lender must respond that they understand what the salient points of the transaction are, and here I’m not necessarily talking about the closing, I am referring to the entire deal structure. More great content in GET Your Loan Closed!
How can you determine if the lender can structure and then subsequently close the loan the way you need them to?
Since you are not able to participate in every loan committee meeting for every loan that is presented for credit approval you need to ask questions of your BDO (Business Development Officer) / Loan Officer that revolve around the bank’s current appetite.
What does food have to do with this? Food is not actually what we are discussing but we are talking about the hunger of the bank. Remember if a bank does not loan out their deposit base then they will not remain in business long. Banks must lend to remain afloat. However a bank must know that they are lending intelligently…and there is that knowing again.
But this time the knowing is on the part of the bank not you. The Lender needs to know the loan they are making is the right one for all parties, the borrower and the bank.
So back to the bank’s appetite…
Each Bank has its own niche’ some banks like business loans, some like apartments, some like hotels, some like self-storage and so forth and so on. Therefore by finding out if your loan request matches the bank’s type of lending criteria you will be more comfortable knowing that there may be a “fit”.
For example, a bank that likes self-storage properties may not like apartments even though they both are classified as commercial investment property loans. Don’t assume that a bank that lent money for your friend’s apartment complex will be the best source of funding for your self-storage loan.
Also… and this is a BIGGY!!!
Find out what this biggy is in , GET Your Loan Closed!
Do your research on the bank.
The more you know about the Bank’s Financial Situation the stronger a borrower you become. The last thing you want is to be dealing with a bank that may be acquired or that temporarily has to stop providing funds while they seek sources for further capitalization. Try to identify and potentially meet with the bank directors (this is more likely to occur in a small town then in a large city) but since I don’t know where you are situated I wanted to offer this suggestion as well.
Check out the financial institution’s website, most banks have very complete information on their site about the bank, their officers, directors and lending policies. In addition all federally and/or state licensed financial institutions as a matter of banking law have to make their financial statements available to the public.
As another alternative, if you don’t want the Bank’s propaganda visit this website which is directly run by the Federal Deposit Insurance Company, otherwise known as the FDIC, the guarantor of your money (subject to insurance limitations) throughout the United States.
http://www.fdic.gov/index.html.
For more information on navigating this website see our e-zine book
GET Your Loan Closed!! now available for immediate download.
HOW TO START WITH THE RIGHT LOAN PROGRAM
Now that you have started on your educational path of Understanding the Loan Process we need to examine how you select the right loan program.
Why is this important?
In a nutshell - By starting with the right loan program your chance for Loan Approval will be much closer at hand.
There are many, many loan programs available. Every bank, broker or friend will recommend an alternative loan, especially after you have started the loan process with one financial institution. It never ceases to amaze me that everyone from your hair stylist to your neighbor is both an expert on Real Estate and more appropriate to this report, an expert on Finance.
This white report will not discuss which loan program is right for you but more importantly you will learn how to know which loan program is right for you. It would be impossible in the medium we are working with today for me to tell you which loan program you should go with. I would be just like your hair stylist or your neighbor. Only you can decide which loan program is the right one for you. Also each new project that you undertake should have a new loan program. Positive results from your last loan program do not automatically mean you should use the same approach with your next project. I recommend that you apply the same process you are learning in these white reports to all new loan scenarios.
How do you know which loan program is correct for you?
The answer quite simply is IT HAS TO FEEL RIGHT!
Now wait a minute Harlan is that all there is, “It has to feel right,” that does not sound technical or even intellectual at best.
As Bruce Lee, the legendary Martial Artist said to his young disciple as he thumps on his chest in the movie Enter The Dragon; “Feelings, You have to feeeeel it, not just do it!”
If the loan selected with all its financial nuances will keep you up at night, then it is not the right program for you in your current situation. So let’s examine the different alternatives when it comes to loan programs.
What types of programs are there?
The most well know programs are Variable versus Fixed rate programs. These categories apply to residential as well as commercial projects. Since this is a commercial and business loan white report I will address only the commercial aspects and leave the residential loans for the experts.
A variable rate loan program will help you to qualify today, but you are subject to the “winds” of the financial storms that inevitably arise and are omnipresent in today’s economic environment. With a fixed rate loan program you know all the variables that will never alter either upwards or downwards. More on this important question in , GET Your Loan Closed!
Another obvious difference will be when it comes to recourse vs. non-recourse loans., understand more by reading GET Your Loan Closed!
So you, as the astute borrower have to measure the likelihood of getting a loan versus the benefit of not having to worry about any other of your personal assets being at risk.
Another important factor to analyze is the loan term. Are you looking for a thirty year, more likely twenty years in commercial, or are you looking for a quick three to five year loan?
The next area you need to examine is that of your down payment. Do you want to use your capital or do you want to do as the money moguls of the 90’s, leverage as high as you are able to, and buy as many properties with as little of your own cash as you can. Lots more points are covered in our 95 color page book, GET Your Loan Closed!
Once the above points are understood you are now ready to talk to different lenders in order to determine which loan programs will meet your immediate needs and which will grow with you as your financial concerns and the economy changes.
A knowledgeable financial broker should be examining all of the above issues and more, before presenting any loan recommendations for your consideration. Any lender/broker/BDO, who immediately tells you that you have to take this loan program, is not looking after your best interest. They are selling you what the bank wants pushed that day. Yes, bankers are sales people also. They have certain product or services that they produce a higher commission, thus they will tend to lead the client in that direction.
I’m not saying all bankers are that way. The hand selected lenders that I personally work with would never look at the banks interest ahead of that of the client’s.
We will always ascertain what is best for the client today, as well as what is best for the client in the future. Now that you have the knowledge, you realize what to ask your lender. You will be able to immediately understand whose interest the lender has in mind, yours or his. That could make all the difference in the world when it is time to GET Your Loan Closed!
UNDERSTANDING THE LOAN APPROVAL PROCESS IN TODAY’S ECONOMY
Your First Step to GET Your Loan Closed!
If you do not understand what is going to happen to your loan application the likelihood is that NOTHING will happen to your application. How many times have you heard your lender tell you “It’s in Underwriting”?
When a lender has no idea what is going on with your loan they always say the same thing, “it’s in underwriting”.
You must understand from the outset that unless you presented your loan to the president of the bank, than the person who you submitted your loan to has absolutely ZERO say if it is going to be approved.
They typically will smile, nod and tell you that the application looks great, and that you shouldn’t worry about the loan getting approved. They will then end with a casual don’t call us, we will call you.
Then what…
You wait…And wait…
Finally, after getting tired of waiting for that return call you pick up the phone - nervously you contact your supposed “friend” at the bank. You politely but firmly ask the status of your loan. If the person even remembers you, they will likely stall, pull up the loan status spreadsheet on their computer, track down your name and the physical location of your file. Then you get the inevitable response that your loan is “In Underwriting.”
Frustrated you respond can I get a better status, can I talk to the underwriter, can I just know if and when my loan is to be approved. Reluctantly your “friend” says that no one can talk to the underwriter and you just have to wait and be patient.
There has to be a better way!
Well we are getting way ahead of ourselves, lets slow down and start at the beginning of the loan process, and after all, we have ten secrets to share with you, not just one.
The loan approval process is a series of mini-approvals which eventually, if done correctly by both lender and client, will yield the final approval. Much more on these mini-approvals in ,GET Your Loan Closed!
Within these reports you will learn the critical components of the loan proposal which must be satisfied by the lender/underwriter in order to advance through what I call mini-approvals.
By now I hope you have a greater understanding of the type of information that I will be giving you over the next thirty days.
Back to these mini-approvals…
1. After the loan is preliminarily packaged and the banker has looked at the details and become comfortable with the loan they will issue a Letter of Intent or a LOI.
This Letter of Intent is exactly that and no more. The Lender intends to take your loan forward. This is not an approval.
2. After step one the banker will request, in writing, from the client that the client wants to proceed. This is done by having the client execute the LOI and the bank requesting a deposit to take the loan to the next step. To view different examples of LOI’s order our book, GET Your Loan Closed!
3. Step three is a massive collection of paperwork from the borrower regarding financials, tax returns, projections, cash flow analysis, bank statements, verifications of deposits, employment, certification of tax returns (4506’s), etc. etc..
4. Step four of the mini-approvals process will be the complete review of all the reports that were requested in step two. Each one of the reports has to be approved so the loan can continue on its trajectory for approval. Find out what all these reports are and mean by getting you own copy of our 95 color page book, GET Your Loan Closed!
5. Step five is the final packaging of all the documentation and the underwriters “write up.”
After all these mini-approvals have been accomplished your completed loan package is then, and only then, submitted to an underwriter. The role of the underwriter is to verify all the submission reports that the Business Development Officer has presented to underwriting
6. Step six is submission to final credit approval, also known as the loan committee.
The loan committee makeup will vary drastically as to whether you are dealing with a small local bank, an independent bank or one of the big boys such as Wells Fargo or Washington Mutual to name a few. Lots more great info in our book , GET Your Loan Closed!
Each bank or financial institution will have a policies and procedures as it relates to credit guidelines. Also, each underwriter will have their lending limit that they can approve without taking the loan to the next level of approval. For example, a small loan of $100,000.00 can be approved by one signature of the underwriter, but that same loan package for $500,000.00 would have to be approved by at least three of the five loan committee members.
After all approvals are done, a final commitment letter is issued and the loan goes to the documentation stage. We will not be discussing the documentation issues, as each bank does it very differently. Instead we will be congratulating you on the fact that you were able to GET Your Loan Closed!
Number ten on the list is lack of collateral for both Business and Commercial loans
With the downturn in appraised valuations collateral for loans is getting hard and harder to meet the lender requisite values. Both SBA 7A Loans for the acquisition of a business opportunity as well as commercial real estate may need additional collateral to secure the loan.
There are two perspectives from which collateral must be viewed when dealing with an SBA loan; the SBA’s perspective and the written policy of a given lender.
First, the SBA. For an SBA perspective, the borrower must ask, what type of collateral do I need for a loan?
Now the guest lenders point of view…
You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character; management capability, collateral and owner’s equity contributions are also important considerations.
From a lender’s perspective, the collateral coverage is slightly different. First, the published collateral requirements for any given lender/bank’s conventional loan programs must be exactly the same as far as liquidation values for its SBA loan programs.
Lenders view collateral at liquidation value as that is what they expect to receive if the loan defaults and they need to call in contractors to “control” the assets and then pay an auctioneer to dispose of them. Assets are in various categories. Basically real estate, equipment and cash items like accounts receivable.
Let’s use real estate as an example. For most lender’s (as all lender’s are different), the liquidation value of commercial multi-use real estate or residential real estate is 80%. So for any property in these categories we would be the appraised market value times 80% and deduct after that any mortgages in the property to yield the liquidated value. Raw land is generally 50% and single purpose properties are 75%. Equipment that is new is in most cases 50% and used is generally 20%. Accounts receivable under 90 days is generally 80%, but based on review of the creditors.
Remember that no matter what the SBA guidelines state, it is the lender’s money in all cases. So the lender generally decides the collateral requirement and then complies with SBA policy, not visa-versa.
For a full discussion of collateral please get our book, GET Your Loan Closed, now with FREE commercial loan training.
Number nine on the list the borrower’ personal needs are too high
Personal needs are the actual expenses that the borrower is incurring everyday to live. Personal needs can consist of rent payment, or mortgage payment which ever they have or both if they own rental properties. It also can consist of car payments, credit card payment, normal living expenses such as utilities, insurance taxes etc.
The lender needs to know that the personal needs of the borrower can be covered from their income, spousal income or through other investments they may have. Personal needs can be covered by the new investment but they will be deducted from the net operating income when the lender does their calculations to determine if they will approve or deny a loan.
I don’t want you to think that net operating income or seller’s discretionary income as sometimes it is referred to will be affected by the personal need calculation. They just want to know that the personal needs can be covered.
There are various methods that a lender may use to determine personal needs. But whether they use one method or another the data is going to come from the borrower’s credit report. Some lenders take a hypothetical number based on experience, other lenders take all their revolving debt and multiply by a factor, and some lenders take all of the expenses on a PFS or Personal Financial Statement and multiply that by a factor.
For example one lender that we work with doubles their annual debt service for revolving credit and 1.25 time any other debt service such as rental property, with a credit for the gross rental income to be calculated in their total income to the borrowers.
If the property or investment cannot support the requested debt service and the personal needs the loan will most likely be adjusted downward or denied
For personal need calculations as well as debt service calculations read our book GET Your Loan Closed!, now we include FREE weekly commercial loan training as well with each purchase.
Number eight on the list the property is in an undesirable location
We have all heard the old adage, Location, Location, Location. If the property is in a desirable location it only makes the lender more comfortable. But we are aware that properties that are not in good locations can still be financed.
The key to location is that the property must fit in with the surrounding environment. For example an industrial building even though it is beautifully maintained in a purely residential area would be hard to finance even if it was built under the proper zoning. The reason is that the property would be downgraded by an appraiser for not “fitting in”.
While on the other hand a “C” property surrounded by all “C” properties would be more likely to be financed. The lenders would not have that much of a difficult time re-selling the property in the event of a foreclosure or a default by the borrower. The key is does the property fit in to the environment, if it does it will be easier to finance?
But there is another more unknown issue of undesirable location rather than just where the property is located. That of where the borrower is located in relationship to where the property is located. A local borrower with a local property can be much easier financed than a local borrower with an out of area property. The lenders want to know that the borrower can visit his property regularly, to keep an eye on the property to make sure that it is well maintained etc. If the borrower is so far from the situs of his property lenders are concerned that the borrower is not going to know exactly what is going on in the property.
For example, we had a client that was very strong, but he was buying a property n Oklahoma, while living in San Diego. I could not find one lender that would entertain this transaction. It was all due to the fact that the borrower was too far geographically from the property.
For more on location and types of properties buy our book GET Your Loan Closed!, now with FREE Commercial Loan Training.
