When to approach the lender?

22 Replies

I'll try to be brief, here's the background;

Last week I was shown a 40 unit complex which I'm very interested in; at the moment I'm waiting on the rent rolls, but even if the pro-forma is off by ~10% it still looks like a great deal. The asking price is 1.6M

The current mortgage on the property is with a local credit union, they are interested in keeping the loan & they gave me the lenders information.

In order to finance the down payment, I will be using two sources: I am selling some property next month which will result in about ~130K in cash, and I also own my office building free/clear which is (currently) valued at $150K. I have done about $30K in improvements to my office, so I can definitely get this number raised some.

My question is; When should I approach the lender? If I'm getting a HELOC or HEL I know the process takes a while, and I should probably get this started, but I don't want to jump the gun, especially since I haven't done any negotiations with the seller on the price (and the lender/seller know each other).

You should involve the lender early on in the process. They will provide you a valuable additional set of eyes on the deal. That will help a lot in the underwriting process since you know they won't lend to you on a crappy deal.

I also suggest you go ahead and get the HELOC setup regardless. It won't cost you anything until you use it so make sure it's there so you can move with expediency.

Tagging @Carlos Flores in case you decide to talk to lenders other than the local credit union.

Michael, should I order my own appraisal or will the lender request this as part of the HELOC process? I want to make sure my office is valued properly so I can get the most out of my loan.

Hi Abraham, We suggest you have discussions with lender very early -,even prior to indentifing a property -your relationship is critical to your offer. Also I strongly suggest using a mortgage broker like Old Capital, as they Can save you lots of time and money plus make sure you have all forms and facts together properly, to insure a smooth closing!! Best to you!!

The short answer: yesterday.
Lenders move slow so you want them engaged as soon as possible.

If you need to complete a cash-out refinance you have to do that now so you will have the cash on hand ASAP and the transaction visible to the next lender that will lend you for the MF.

One more option you have is cross-collateral loan. Basically it means the lender will put a lien on both properties for one loan.

Upside: you only pay loan fees once and it's usually faster than completing 2 loans in a very short period.

Downside: you lock both properties with one lien which makes the exit strategy a bit more complicated.

Thank you for the answers, I have called & left the lender a voicemail. I am still open to any other input, this is great advice guys! I'm glad to be part of the community.

I would like to add two things to the helpful answers you have already received.

1) It's great that the current lender wants to keep the loan, but don't limit yourself to them. Shop around to see what else is available to you. You may find a better product elsewhere, or you may a stronger negotiating position even if you do end up going with them.

2) About those properties that you are selling to raise capital- will you be paying taxes on them? If so, it may be worth looking into doing a 1031 exchange to avoid the taxes. There are several experts who can guide you through that process on BP- @Dave Foster for example.

@Abraham Anderson , Great point made by '@Patsy Waldron .  It probably won't be what makes this deal viable or not, but you've probably got the opportunity to do a 1031 exchange on those two properties you're selling.  Go ahead and sell the two but use a qualified intermediary to process 1031s on them and use the proceeds as part down payment on the new complex.  By doing so you'll not only defer paying tax on any gain but also the depreciation recapture which could be significant if you've owned those properties for a while.

I recommend you go ahead and get pre approved for the max amount. Then just have it waiting there for when you decide to utilize it.

Thanks for the shout out @Michael Le .

@Abraham Anderson , you'll need more cash than the proceeds from those two properties in order to get the deal done.  $130k from sale plus 70-80% cash-out from the office building won't be enough for a down payment on $1.6M.

Carlos, I have an office building currently valued at 150K that I own free & clear, I'm also going to borrow off that. 

Abraham, I was including the office building. $130k from sale plus $120k (150k x 80%) cash-out from office building = $250k. That's only 15% of $1.6M. Down payment will likely be 20-25% unless the cash to existing note is less and the CU allows you to assume it.

@Carlos, I am looking for a lender who ideally requires only 15% down.

I met the current noteholder of the property. He is willing to do business with me, but the terms aren't good. Only a 5 year note (!) and 20% down, no way.

How should I approach other banks? Calling them on the phone & asking their terms, showing up in person?

Correct me if I'm wrong but I thought commercial loans have shorter term and higher down payment than a conventional loan. 

Kaz, I think I remember reading this. So what do most commercial investors do? Buy with a short term note & then refinance with ___ ?

From what I've seen the deals they do are likely to be 5 year term then do some value add and sell for a profit. I'm not sure if this is the norm but this is what I see the most. I'm sure they have more exit strategy in case the market is not ripe for exit after 5 years.

My strategy is buy and hold, I'm not looking to flip. What are my options for long term mortgages? 

This is from investopedia. Looks like you have hope :)

Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years. In this situation, the investor would make payments for seven years of an amount based on the loan being paid off over 30 years, followed by one final “balloon” payment of the entire remaining balance on the loan. For example, an investor with a $1 million commercial loan at 7% would make monthly payments of $6,653.02 for seven years, followed by a final balloon payment of $918,127.64 that would pay off the loan in full.

@Abraham Anderson

I just talked to a local credit union.  For commercial, they will give a minimum $1 million loan and they have 25 or 30 years term but it will be amortized.  Just like what @Kaz M. mentioned above.

Between now and when the 7 year balloon is due, is there a way to refinance so I don't have to come up with ~1M? I've heard of people refinancing through Fannie Mae, is that common?

I think you should start calling those local banks or credit union because each bank has their own terms.  I don't think the one I called mentioned anything about balloon loan.  some banks has a minimum $1 million, but other banks can go down to $100,000.

Originally posted by @Abraham Anderson :

@Carlos, I am looking for a lender who ideally requires only 15% down.

I met the current noteholder of the property. He is willing to do business with me, but the terms aren't good. Only a 5 year note (!) and 20% down, no way.

How should I approach other banks? Calling them on the phone & asking their terms, showing up in person?

Probably 5 year term with 25 yr am. Calling around asking for 85% leverage will damage your credibility before you even get started. It's a long shot but see if the CU will allow a seller 2nd.

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