When investing out of state, the type of lender that’s best really depends on the type of loan product you need.
There are certainly nationwide lenders in both the commercial and residential space, but what you’re trying to accomplish matters most in terms of what type of bank you approach.
Nationwide hard money lenders are popular right now for fix-and-flip loans. Asset-based lenders and buy and hold loans seemingly go hand in hand right now, too.
For either of those two strategies, location is largely irrelevant. And here’s another example when the lender’s location doesn’t matter much: commercial loans for large assets.
What’s great about both hard money and asset-based lenders is that many of them don’t care about buyer qualifications either (credit score, income, etc.). These lenders can issue loan products in this manner because they generally come with high costs in both interest and points to counterbalance the usual due diligence on both property and borrower.
So, in cases where you need a lender quickly and/or won’t pass standard underwriting, a nationwide hard money lender works perfectly fine. The rest of the time, for most borrowers, you’re going to want to do business with a bank that is in the same area as the property. Here’s why.
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Residential mortgage lenders are certified by state. So if you’re looking for a one- to four-unit property out of state, it’s quite likely that you’ll be forced to get a lender in that state anyway.
Many commercial lenders are going to operate exactly the same way. It’s not necessarily because of certification, but rather they prefer to lend in markets they know.
When lending, banks are investing money into you and your deal. Therefore, they want to make sure that you and the deal are going to make money. They are going to want to do extensive due diligence for the same reason you’re going to: you both want to know the deal is going to be profitable—without having to take a stranger’s word for it.
Trust is not part of the 5 Cs of credit—those being character, capacity, capital, conditions, and collateral. And it’s wise to expect a bank to ensure your deal is just as lucrative for them as it is for you.
In fact, in most instances, the bank is going to be the majority stakeholder (50%+ LTV) in your asset, and they don’t want to lose money.
With that in mind, think about how much more difficult it is for you to buy an asset out of state. Now, I’m a heavy advocate of buying out of state, but I know my market and I have a solid team on the ground.
If you’re in California and you want to buy a property in Mississippi, my hope is that before you sign paperwork, you have spoken to a property manager, a contractor, a realtor, and fellow investors to help you make a good decision.
Why would I suggest this? It’s very simple. You don’t (you can’t!) know the market if you’ve never lived there.
Possessing a deep understanding of the market you’re buying in reduces risk, regardless if the deal numbers make sense. “Location, location, location” isn’t the first rule of real estate for nothin’.
So, if the bank you’re trying to borrow from is also in California and they don’t have any people on the ground in Mississippi where the asset is located, how could they possibly do an appropriate amount of due diligence?
The Lender Becomes a Partner
This might be the biggest discrepancy I see between the borrowing side and the lending side. When I see borrowers talk about loans, they tend to only see the terms of the product and the requirements to be filled.
They look at it like a checklist:
People treat getting a loan like buying a sandwich off a menu, but lenders are more complicated than that. We want to know who you are, what’s your track record, what you’re trying to accomplish, and how you’re going to succeed.
What you borrow also depends on the size of the institute.
For instance, if you ask Wells Fargo for $100K, they want to get that tiny deal done as fast and as easily as possible. It’s just too small for them to really care!
The smaller the bank, the more scarce their resources, and the more vested interest they will have in the deal—and in you.
This makes them closer and closer to a partner rather than just a product dispensary.
A bank or broker that’s in the vicinity of the asset knows the market well already (hopefully). They will know which deals make money and which ones don’t. And they have all sorts of other metrics to help decide where they want to efficiently deploy capital, too.
You may be at home thinking, “I want to buy a fourplex in Nashville.” You go find one and run the numbers, and they seem great.
You get an asset-based lender to put up the cash, you pay their astronomical fees, and you get a property manager or contractor to handle the project. The problem here is that you have created a project with asymmetric incentives among everyone involved.
The lender gets their points up front, and they have a first position on deed of trust. They don’t want you to fail, but they won’t really care if you do. They already made their profit!
The property manager/contractor will make money for the work regardless. Of course they want you to close, but they have no vested interest in the long-term success of the deal. They’re getting paid even if you aren’t.
Only when you get a lender local to the asset will you have a second party who has actual skin in the game with you. When working to secure funding, a local lender won’t let you buy a property that you can’t make money on—or even one with low margins where they’d live in fear of default.
They need to make their money after you’ve made yours. That’s a good partner, one with aligned goals.
Consider the Long-Term Prospects
Are you going to stick around this area for a while or is this a one-off purchase? If it’s a single deal (especially a flip), then the lender location may not matter as much.
But the more business you plan to do in an area and the bigger the assets, the more impactful having a property-local lender becomes.
If you grow a portfolio out of state and develop a relationship with this lender, they may even refer you to the occasional deal, as well as potential partners.
Visit the area—show that loan broker that you’re dead serious about your intent to close on multiple deals—and they will be much more likely to introduce you to their circle of influence.
If you’re ambitious enough to make some serious moves, consider how much of an impact something like this will have on a small lender. It just might be monumental in creating a long-term, mutually beneficial lender relationship.
To reiterate, I’m not saying you can’t foster this relationship with your preferred in-state lender for out-of-state purchases. However, it’s significantly harder for banks to issue money on deals in areas where they aren’t familiar.
Is it worth it to you to constantly fight that battle? Probably not.
Find a lender local to the area where you want to do business, and focus on long-term mutual growth.
Am I right, or am I right? I welcome your opinion, even if you think I’m wrong.