BiggerPockets

Hello - a friend suggested tonight that my business partner and I apply for a Business LOC with a local bank and is connecting me with a person there to speak with. I'm concerned, however, about whether we have a chance at qualifying.

My partner's LLC has been in existence a long time but she wasn't very active the past 2 years and is essentially coming out of retirement to do rehabs full-time (a r.e. broker, she used to primarily list properties while doing a few investments here and there). Thus, there isn't much to show in the way of assets for the LLC. As for me, I'm pretty new to the rehab business so I understand I still have a lot to prove.

However, my partner's personal credit is 810 and she has equity on her personal home (about 60k). And the project we have under contract - the one for which we'd use the LOC - has good numbers. We'd look for a maximum of 150k, which includes purchase price and a chunk of the rehab, and the ARV is 250k. Hell, we'd be happy with anything the bank could provide for a LOC b/c it would still be cheaper than hard money and private money!

What else do I need to know? What else will the bank want for info, and what can we do to make our case?

Thanks!

I'll have to double-check with my partner, but I believe she does have a free and clear single family. The tricky part is that I think it belongs to another entity, i.e. a different LLC than the one we're using. Either that or it was purchased using a Land Trust and I'm not sure how she would demonstrate ownership. It's a good question and I will find out from her tomorrow.

Thanks, Steve, that makes a lot of sense. I might have misspoken, as I believe she has a HELOC on her primary residence with another 60k available on that (she used part of it already) ... so I'm not sure what the exact equity is overall. A second single-family that we rent out as a vacation property is free and clear and is probably worth about 200k-plus, and has positive cash flow.

I have to gather a bunch of information, was wondering what the bank would be looking for. These responses are helpful in showing me some answers I need to find.

Absolutely, @Kevin Yeats. We'd walk through the scenario very carefully. I guess I've been kind of thinking out loud here, wondering what the bank might ask for and if we'd have what they want.

So I suppose the real question is: if our rehab business is pretty new and the business itself doesn't have much to show for assets and collateral, is it possible to get a business LOC? What's a reasonable expectation, if any?

Thanks again, @Kevin Yeats. A LOC is a bit different from a loan, though, right? Ultimately we'd be doing the same thing, paying money back, but I thought the initial approach and application was different, no?

In my area I've found the small "local" banks more willing to work w/you.

Originally posted by Karin DiMauro:
Thanks again, Kevin Yeats. A LOC is a bit different from a loan, though, right? Ultimately we'd be doing the same thing, paying money back, but I thought the initial approach and application was different, no?

Yes, there are differences. First I want to back up a couple steps. There are a couple ways to find out what your bank wants. The first one is obvious - just ask. The second method is to find the bank's historical lending via reports from the FDIC. The third method, which is sometimes the best/most revealing, is to read their SEC statements.

In SEC filings, you want to find their underwriting criteria. Here is an example of what a bank in my area wrote in their last annual report (10-K): "Residential mortgage loans represent one-to-four family loans originated through NSB Mortgage and selected by the Company to be retained in its portfolio. These loans are subject to strict underwriting standards which are at a minimum per the FREDDIE MAC guidelines and typically have terms within 10 to 15 years with moderate loan-to-value ratios, typically less than 70% and with credit scores typically exceeding 740." From county recorder's records, this bank lends to LLCs and on property that is price and loan dollar-wise similar to what I invest in.

Back to their SEC filing, now that I know that what they call a "Residential mortgage loan" is what I need information about, I can see that in Table E they are making loans. Why? The summary of loans segregated by loan category chart for "Residential mortgage" for December 31, 2011 shows $40.4M in loans, or 8.3% of their total loans. June 30, 2012 for the same loan category shows $63.8M in loans, or 13.2% of their total loans. This is a bank worth talking to.

Use this same process for every bank in your area. Some banks don't give out great details on their underwriting. Here's another bank in my area that spells out details very clearly at the top of page 33.

There are good hints in many of the documents. "The limited lending opportunities and the aggressive problem loan resolution program has reduced the loan portfolio by $212.9 million..." This means your chances of getting a loan are probably not as good. Maybe you put this bank at the bottom of your list. Other bad phrases: "Losses ... have further eroded the Bank's capital levels, and the Bank is now significantly undercapitalized.... Reduce the real estate credit concentrations in the Bank's loan portfolio..." Hopefully you get the picture.

Great points @Chris Martin. I'm a call report junkie so I like to look at construction loan and commercial real estate exposure as a percentage of the portfolio to see what the bank's appetite is for real estate.

@Karin DiMauro don't discount the ability to use the asset you are rehabbing as collateral! When you present a deal to a banker just make sure that you are providing concrete evidence, i.e. comps supporting why the collateral will be worth what you think it will be worth.