Banks - Can't live with em, can't live without em

13 Replies

My deal.  25% seller financing. I wanted 75% bank financing. 2 different banks won't even take it to committee. One of the banks, I have dealt with for 10 years. Many loans on properties, lines of credit, construction loans. I have made a ton of money off bank leverage. But now have hit the wall.

They won't even consider it unless I come up with 10% - cash.

I, probably like most investors, I never have cash. I am always fully invested in property. I have tons of equity. I even offered them a first mortgage on $700,000 worth of houses for collateral instead of cash.

Oh well. I will be back to my old game of focusing on paying everything off. Who needs banks anyway.

Frustrating

Reminds me of a famous Desiderius Erasmus quote.

Originally posted by @David R.:

Reminds me of a famous Desiderius Erasmus quote.

 And it is...?

Sorry @Jon Klaus  

I thought this one was obvious  :)

@Arlan Potter  

I can't believe they still said no when you offered a first mortgage on a $700k property.  That is insane. 

Originally posted by @David R.:

@Arlan Potter  

I can't believe they still said no when you offered a first mortgage on a $700k property.  That is insane. 

Banks want to be paid back with cash not to take property. They take positions with liens but ultimately their goal isnt to own a REO but rather to keep the velocity of their money churning so they can get paid a huge spread and relend it out again.

With a fractional reserve requirement of 10% or lower they suffer massive opportunity costs by the prospects of taking back a property that most likely won't even sell at market value.

David's problem was probably cash flow and liquidity. If I was underwriting the deal I would look at the cash flow on the subject property, the cash flow on the global perspective with all the personal living expenses, and other liabilities and then look at what the liquid reserves are.

Albert, you're right. Funny as boasting is overtaken by failing to qualify. Bridge loans and cross collateralized loans are done every day.    

Originally posted by @Albert Bui:

Banks want to be paid back with cash not to take property. They take positions with liens but ultimately their goal isnt to own a REO but rather to keep the velocity of their money churning so they can get paid a huge spread and relend it out again.

I understand that banks want to be paid back and not to own real estate. My deal would have them at a 64% loan to value. Not an inflated market value but the actual purchase price, backed up by appraisals. It seemed reasonable to me. Plus the fact that I have been investing for 11 years, and would do anything not to lose a huge chunk of my portfolio. I just don't want to sell 10 nice rental properties in order to have cash in the bank to do a large deal. Like I said before, a couple of local banks have helped me build a small rental empire, but they have their limits.

10% cash

15% owner finance

75% bank finance

Still a really good use of leverage. Are you moving forward with the deal anyway?

Sounds like the answer is to set up your collateralized lines ahead of time. It's not having cash, it's the (on-demand) access to cash.

Originally posted by @James Wise:

10% cash

15% owner finance

75% bank finance

Still a really good use of leverage. Are you moving forward with the deal anyway?

I don't have $416,800 sitting around in the bank. We do have a Line of Credit, but only to $200,000. And some used on it so not all available.

So you are saying you are trying to buy a 4,100,000 deal putting 10% down?? Is that where you are getting the 416,800??

On larger commercial deals I see the lender wants to see liquidity and net worth balanced out. If anyone of them is more they want it to be the liquidity.

If there is a problem maintaining the property they want to see you have liquidity to handle it. If the property has leases coming due soon etc. they will put in a sweep provision clause if the DSCR drops below a certain number for XX number of events. This is called a "trigger event" clause. The lender will take extra reserves out in that situation.

Lenders look at liquidity in forms of checking, savings, stock, mutual funds & money market accounts, cash value of life insurance policy, 401k, IRA, etc. Something you can liquidate for cash quick if needed.

Investors assets they tend to overstate the equity value they think they have in a property or properties. Once they go to pull money out the appraisal comes in much lower. I have seen this on deals before where the buyer came up short pulling equity out to put down payment. They either had to cancel the contract or rush to land a partner.

Banks change over time. What might have been acceptable for them to give you on a loan might have changed over the years due to regulatory reform. The committee if they approve a bad loan can lose their job. Also if the bank closes the FDIC can open an investigation into their lending practices. If protocols were not followed outlined by the government for safe lending practices that caused the bank to go under the officers can face criminal prosecution. I have actually seen a few of these cases happen.

In banks for very high net worth people they have what are called "wealth preservation group" departments. These clients have million to tens of millions of dollars or higher in liquidity. The banks will give better loan terms not found just by calling in but it's more relationship based then the deal. They want your deposits in that case and to manage some of your wealth with their traditional investment vehicles. It's not worth it in most cases because a big percentage of your liquidity has to stay in low return bank accounts etc. for them to give you great loan terms on properties you want to buy.

Example you have 50 million liquid. Banks says they will give 10 year term and 30 year amort. at 4.5% fixed when other banks are doing 5 to 7 year terms but 20 year amort. and want 30% down instead of 25% down for the other program.  The downside is they want 50% of your liquid cash in their investment vehicles yielding low returns versus what you can get in real estate.

In that instance it makes sense to go CMBS, life insurance etc. so that you get great loan terms but do not have bank requirements put on you for holding your money. CMBS etc. has higher loan costs but has other benefits not found with traditional banks. When my buyers are looking at a loan multiple things come into play.

DSCR - down payment

Reserve requirements

Non-recourse?

Any pre-pay penalty?

Loan term?

Loan rate? Fixed or floating?

Amort. schedule?

Origination points? 

and on and on. The borrower has to decide what is more important in a loan to them and the type of property they are buying.

I think 10% down is a great deal from a bank. If I was on the committee I wouldn't do 100% either. Although the banks loan LTV as you stated is lower as the senior note many lenders will not allow a seller second because they want to control in a default event. So in commercial a lender might stipulate they will give a B piece second note as long as they are the ones doing it. They want total control if you pay the second and not the first note or vice versa for a workout situation.

At this point maybe you get a partner if the deal is really good. A smaller piece of something great is better than nothing at all if you can't reach it by yourself. I would be looking at the terms of the loan as well that go with that 10% down.      

Originally posted by @Joel Owens:

So you are saying you are trying to buy a 4,100,000 deal putting 10% down?? Is that where you are getting the 416,800??

It is $4,168,000 according to my calculation, but what is $68,000 among friends.  lol

Arlen,

I see loans all the time with mezz debt built into the loan structure.  The banks may be concerned that you are doing a second loan to the seller as opposed to mezz debt.  The difference is subtle, but with Mexx debt, the seller would not be able to sue to foreclose the first, but rather take over ownership of the property if you dont pay according to the terms of the Mezz debt.  

The banks may also be concerned that you have no skin in the game.

Mark

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