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.
Number seven on the list the borrower does not have the requisite experience
SBA Loans made by SBA Lenders which are the predominant type of loan for the purchase of a business want direct experience in the industry as well as previous ownership in the same field. There is one exception though where the lender will apply any retail experience to another type of retail store.
For example if you owned a shoe store and you wanted to purchase a hardware store the lender may see that as direct experience. However if you are an engineer and you wanted to buy a Chiropractic practice even though you are an owner of a previous business that experience would not be transferable.
In addition many businesses in the professional area need a license to run the business, so if you are not licensed they will not lend you the money to buy the business. For example a non-broker could not purchase a Real Estate business, likewise an individual who wants to purchase an insurance agency could not buy one without the proper insurance licenses in place.
Does management experience in the same industry qualify as experience to purchase a business?
Today probably not, Ownership interest is drastically different than management experience. As a manager all you need to do is run the day to day business. As an owner you have to handle all of the management as well as the ownership responsibilities such as paying taxes, filing financial reports, hiring and firing employees and making decisions that are directly related to the overall finance status of the business.
Experience is also becoming paramount for the purchase of commercial investments as well. I have written an article that will be published in the Scotsman Guide in March that looks at experience in great detail.
For the role of experience please see our book GET Your Loan Closed!, and with purchase we are including free weekly commercial loan training.
Number six on the list is that the property leases are not long-term but are month to month
This blog will probably be the shortest of the ten.
Very simply the longer the lease term the more comfort the lender has with the project. Month to Month tenancies, where the tenant has to give the landlord only a thirty day notice to vacate do not give lenders comfort.
Long term leases on the other hand give a high comfort level to the lender that the projections and the actual rent roll presented to the lender in the underwriting process should remain intact.
What is considered long term. A minimum of five years is what the lender is looking for these days. A Year to Year tenancy - if the tenants have been there for many years and they have a consistent pattern of renewing their lease every year that may be good enough. Especially if we are talking about commercial tenants. Commercial tenants have a tendency to stick around a lot longer. They have made their business presence known in the community and they do not like to move about, unlike residential tenants where any change can cause them to move.
Less than thirty day tenancy is no even considered!
Enjoy our book GET Your Loan Closed and now get free commercial loan training with every purchase.
Number five on the list the borrower does not have enough closing liquidity
As we have mentioned in previous blogs cash is king, so it is no wonder that lenders are now looking very closely at closing liquidity.
What is closing liquidity? Closing liquidity is the amount of ready cash that a client has after the transaction is closed. It is not the amount of down-payment; it is what is left over after the investment has been purchased. Lenders want to know that a borrower has at least six months worth of carry.
If the new investment that the purchaser acquired has any shortfalls the lender wants to make sure the borrower can cover the shortfalls. For example you bought an apartment complex and it was leased to 95%, then all of a sudden vacancies occurred. The lender wants to make sure you can cover those vacancies as you look for more tenants.
Another example relates to business opportunities. You’ve bought a business based on the representations of the seller, the financials of the seller and the tax returns. However, you find out that once you take over the business the clients that the seller represented were going to stay have now jumped ship. The lender wants to make sure that you have enough working capital to survive the transition. In some transactions we are actually able to fund a certain amount of working capital, to have a stronger financial statement. But the lender also wants to make sure that you have adequate funds for reserves available if needed.
In our economic state we are in now, closing liquidity is getting more and more important. The lenders are looking very closely at a clients personal needs and also determining how much discretionary income and savings they have before they are funding loans. The last thing a lender wants today is to take back another property. If you as a borrower having a great deal of LIQUID cash that is going to give the lender a great deal of comfort. So much comfort that they may actually do a deal that they were not originally planning on funding. The obvious reason is that you can support a change in circumstances; the less obvious one is that they can possibly get your “strong” banking deposits.
For more on closing liquidity please read our book GET Your Loan Closed! now for a limited time comes with FREE Commercial Loan Training.
Number four on the list is the property does not appraise at the purchase price or better
Number Four is a Biggy. If the property or the business does not appraise for the purchase price or better that should tell you one thing and only one thing – You overpaid for the investment. Unlike residential property buying a commercial investment or a business opportunity the bottom line is that you want to make money. If you are overpaying for the opportunity you are automatically losing money because you paid too much.
Also unlike residential all buying decisions for a commercial property or a business opportunity needs to be totally unemotional. If emotions are involved then you will not make the right economic decision. Having an appraisal be returned that is not what you expected immediately should cause you to re-evaluate the purchase. But if you are emotional then you will not re-evaluate and you will most likely move forward on the investment.
BUT, then you try to finance the investment and the appraisal comes in lower – what do you do? You have to either re-negotiate your sales agreement, get seller concessions, or walk away.
With SBA Loans, all businesses greater than $250,000 are now required to have a business appraisal, or business evaluation. The larger the purchase price the more in-depth the business appraisal. The lenders must know that you are paying a fair price for an investment before they will lend you the money. If an appraisal comes in lower the lender will ask you to put in more money or re-negotiate the deal, they will not fund the difference. Or in some circumstances they will just flat refuse to offer any financing.
Lastly to reiterate one of the words of wisdom of a previous post – Do not order the appraisal yourself!
To get much more information on the entire appraisal process, and how the lenders evaluate the various reports that are furnished by the appraiser pick up our book GET Your Loan Closed!, now with free commercial loan training.
