Let me start off by saying that I’ve had my fair share of failures when it comes to obtaining bank financing—I get turned down every year for a loan. But, I’ve also had many successes over the years and have obtained many mortgages in my own name (at one time 30), as well as for numerous loans for LLCs, commercial properties, etc.
Currently, I’m working with a money broker to get me bank financing for delinquent mortgages, which by the way are probably the toughest thing to finance. So far I haven’t given up, and we’re getting closer. Although there have been many articles written on Bigger Pockets about this topic, such as “10 Ways To Work With Banks To Get The Financing You Need,” I was inspired recently when one of my employees had been repeatedly turned down for financing, and I see all the pain he’s going through, as well as some of the messes he’s ended up putting himself into. At the same time all of this is going on, I have a real good friend who never seems to have any problems getting bank financing.
So what’s the difference?
Assuming that both of these individuals have taken care of the technical side and both have good credit, the difference is that one has done his homework and the other has not. As an analogy, both of these men walk into the same Mortgage Store. My employee tells the store what he wants to buy. My friend, on the other hand, knows what the store is selling and to whom the store is selling it to, and he comes prepared to buy it.
Some of the things my friend does, which make all the difference for him, are actually pretty simple.
How to Analyze a Real Estate Deal
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Networking and Building Relationships
My friend chooses to surround himself with successful people, and he finds out where they get their money. Oftentimes, he will take a banker to lunch. But instead of telling them what he wants, he asks the banker what they are looking for or what their ideal customer looks like. He asks them what kind of loans the bank likes to write in the current market. Even if that particular bank’s goals don’t line up with his own, they may suggest a different bank for him. One bank told him about three years ago that they like lending for apartments. So, he proceeded to use private money to acquire and renovate a ton of student housing in the Philadelphia area, and then he refinanced these properties out with commercial financing. Today, he has several hundred student rentals that are projected to be paid off in 12 years, all by doing his due diligence and finding out what the bank wanted in advance.
Utilizing Money Brokers
My friend says that money brokers are very helpful for completing deals and that utilizing their services saves him both time and capital. I tend to agree, as I have been working with money brokers as well for several months now. They’ve been tremendous coaches on preparation, and although I haven’t heard a “yes” yet, I anticipate one in the future. A money broker can tell you exactly what you can improve on to become more appealing, and they have connections to everything from a warehouse line at a bank to a broad range of investment banking solutions. They can put your business in contact with banks or investors, who are looking to lend capital, if your company fits their specifications.
For a great resource, which helped my partners and I prepare to meet with a money broker, check out chapter 10 of Mastering the Rockefeller Habits by Verne Harnish. I first acquired this book when I was out to lunch with a business planner; and so, networking helped in this regard as well.
If you don’t have a business, mortgage brokers are also helpful. They can take your information and shop your request to 30 or so banks with just one credit pull. Using a mortgage broker can help you find the right bank in a short period of time. If you’re shopping for a loan independently, however, the process could take longer and even cost you more money.
Another thing he does, which many of you may be doing already, is coming completely prepared when he finally goes to the bank. Because he talked to the bank in advance about what they were looking for, he is better equipped to present his request. He has his portfolio together, consisting of all his past real estate deals and a representation of how successful they were (track record). My friend uses his track record to show the bank— hey this is how I made other banks money. And, this is how he ends up getting several banks to compete for his deal.
He also has his finances together, meaning that he has all the necessary documents with him. He makes sure that he knows his numbers and projections and that they make sense, even if he has to run them by a friend first. I know this because we often meet for breakfast, and he asks me to look some of it over. Finally, and maybe most importantly, my friend has a well-defined business plan. He knows his exit strategy, and he can present all of this to a bank with the confidence that he has planned the deal out.
He found out what the bank liked the most, in a down market, and then he delivered.
So What Can We Learn From This?
It pays to line up the money first, as this prevents a lot of hardships and problems down the road. It also pays to have a plan B, whether that is an SBA loan, P2P money, or private money. I always expect to get shot down and have a back-up plan ready in case. But, I’d say that the number one take away from my friend’s experiences is to do your homework, be prepared, and take a banker to lunch.
Remember: don’t tell him/her what you want; ask them what the bank likes to lend on. Then you will know quickly if it’s a fit. If it’s not, you can move onto the next banker or money broker, who may be better suited to fit your strategy.