Bank Negotiations
Of my many hobbies in life, studying the game poker is the one I have invested the most time in. If you play poker a few times a year for fun with your friends, you may not grasp my meaning. But for those that have dedicated hundreds of hours studying the game like I have, you understand how much the fundamentals of poker transfer into negotiating and REI. Well it was time to sit down with the bank and play poker.
My very first meeting with the bank to negotiate this purchase had to be done from a position of strength. I could not walk into that meeting and let him dictate the terms of this deal. Lets face it, I was a homebuilder that had been killed by the economy. My last 4 years of tax returns look like swiss cheese. And I simply do not have the ability to purchase this deal if I have to put and money down. Given all of that, if I start letting him call the shots I'm screwed!!
So how do we negotiate from a position of strength with a bank, when we do not have the ability to show him tax returns with any taxable incomes, or the ability to plunk down a huge equity investment? Well, we first have to understand what Mr. Banker has and what he needs vs what he wants.
In the case of this subdivision, what Mr. Banker has is a subdivision that has gone in to default by two different owners, both of which he financed. And right now he has a $700k note that the current owners have not paid on in 18 months. He has a board of directors that are asking him why he has not foreclosed on the asset, yet continued to give them a construction loan even after they where in default.
If you want to know what effect this has on the bank, here is a good article that will save me a few thousand words of typing.
http://www.allbankingsolutions.com/Articles/NPA-im...
Now that we understand the bankers position we can begin to formulate our plan. Our plan is simple. Create a win win for both parties. Ok I will get specific.
Bank Meeting - Shock and Awe
What is the best way to negotiate from a position of strength that shows your opponent your serious, and at the same time catches them completely off guard putting them completely on defense all at the same time? Well I brought a commercial banker friend of mine to the first meeting completely unannounced. Im 100% certain by the look on Mr bankers face that his entire game plan for negotiating this deal just went out the window.
Mr Banker now has one of his peers in the room that is working for the buyer. This meeting has gone to a new level once my banker friend starts asking a lot of well directed bank/FDIC questions. I understood about 4% of the bankerese language that was going on. But the meeting definitely worked in my best interest.
I finally pull out my spreadsheets, handing them to Mr Banker and said " The numbers in these documents are what it will take to make this project profitable. I am not going to be the 3rd person to fail in this subdivision. Based on my budgets and sales forecast, the property you have is worth $468,700.00 to me. The only variable left is your ability to structure the financing in a way that will allow this project to finally succeed."
Notice we don't ask for any terms, right now is time to keep quiet and listen.
Mr Banker looks up and says "I need this project out of my NPA and back in my performing assets class. You are the first person to sit in front of me who gives me the feeling we can finally see this project get completed. What kind of capital reduction can you do up front (down payment), and what do you need from the bank to succeed in this project"
The way I answer this question, right here right now is for all of the marbles.
If i say, I can't put up a down payment, I look weak. Even tough its the truth.
So my answer was
"As you can see by the cash flow statement, I have based this deal on financing the entire purchase price. I am allocating all of my cash reserves towards covering startup and carrying cost during the 1st 6 months of the project until cash flow from the sales starting coming in." (At this time I already have 1 contract for a pre sold on a property I don't own =) )
"On top of that, I need a commitment from your bank for a construction loan on 1 spec building based on 80% LTV for the life of this project."
Mr Banker didn't think all that long, looked at my banker friend and said " There is no point in financing the land without a construction loan so there is no problem with that. I'm thinking I can do prime for 2 years I/O with draw downs against the principle when we do Construction Loans. Construction loans will be at prime +1. Let me run this past my bosses and see how they feel.
BOOM ! I just put together a deal. The bank feels like they can finally move this dog of an asset, and Im going to be getting my life back.
My banker friend and I walk out to the car and he tells me " Dude I can't believe the deal he just offered you, he must be taking some serious heat from the bank to move this property."
So I also put a deal together with my friend where he will supply me another construction loan for a spec building.
And thats how I managed to purchase 22 lots, and 2 construction loans with no money down.
