Last week I wrote an article talking about finding investor-friendly real estate agents (actually, I was really questioning whether they even exist or not… see The Epic Guide to Finding an Investor-Friendly Real Estate Agent). This week, I want to talk about lenders. Why? Because in the past month, I have seen a solid handful of deals tank, or nearly tank, solely because of the lender on the deal.
Whether a real estate agent is investor-friendly or not isn’t a big deal (just a pain and possibly inefficient if they aren’t). But lenders? It’s critical they are investor-friendly because lenders hold your deal in their hands and they are amazingly good at killing deals. So if you want to keep your deals on the table, make sure your lender is investor-friendly.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Is There Such Thing as an Investor-Friendly Lender?
Yes, there is. What constitutes an investor-friendly lender exactly? Well, I’m not certain to tell you the truth. Most definitely, though, they work largely with investors rather than primary homebuyers. I can tell you one thing, the big banks are not typically investor-friendly. Wells Fargo, Bank of America, Chase… all the ones you know and love (or don’t love) are not typically investor-friendly. Despite being good banks for normal banking purposes and even for loans on personal residences, they are not accustomed to funding investment properties and you stand a really good chance of losing your deal.
So what can a smaller lender do that the big banks can’t do that makes them investor-friendly? Well, I don’t know that either. Maybe someone reading this knows the internal workings of mortgage lending and can explain how it works. My guess is, the big banks could be more investor-friendly but because of how large their corporations are and since investors are not their primary clients for mortgage lending, they wouldn’t get a lot of benefit out of spending the time or effort to be more up on lending on investment properties.
They are likely under much more stringent microscopes when it comes to their processes and procedures than smaller banks are which means they probably just don’t want to go there. That is not to say anything the smaller banks do is illegal or they are working the system at all, it’s just that they aren’t under that microscope as strongly so they have more room to maneuver. I could be totally off on all of that and maybe someone reading can give a better explanation, but that’s just my best guess.
Why it is how it is doesn’t matter. Just know that not all lenders are banks are investor-friendly (for whatever reason).
How Can Lenders Kill Deals Unnecessarily?
Well again, something I can’t speak to the internal workings of. This article gets more informative by the minute, doesn’t it?
In the last few months, I have seen some of the following things happen:
- A loan was denied because the appraiser found issues with the property that needed to be fixed. I’m not sure if a lender can really deny a loan based on that, but maybe they can. Regardless, the seller agreed to all of the fixes and even wrote them out in an addendum in the sales contract saying they would be repaired and the lender went ahead and denied the loan still and said no.
- The lender refused to let a different appraiser evaluate the property after the first one blatantly misread comps from recent sales and therefore severely undervalued the property in question. The value was unjustifiably low and the deal fell out. The appraisal was very obviously wrong but the lender wouldn’t allow for the adjustment.
- A cash deposit that couldn’t be accounted for in a buyer’s bank account (accounted for in terms of written proof) caused denial by two lenders but finally a third, who didn’t need to see seasoned funds dating so far back, approved the loan.
- After three months of being under contract for a property, and the loan was approved but contingent on the final construction and appraisal of the property, the property became ready and all of a sudden the lender denied the loan based on the buyer “not having enough credit history”. Huh? Wasn’t it approved long-before? And it took three months to decide that?
- In some cases, apparently there is a formal statement about a buyer’s income that has to be signed and that signature expires after 30 days and has to be re-signed. For this particular loan, the underwriters continued to question random facts about the buyer’s qualification for so long (and for no reason at all), that it kept triggering that signature to have to be renewed. The bank became so harassing to the buyer’s accountants about the signature, the accountants finally told them to never call their office again. The loan was denied for ‘lack of proof of income’. The buyer tried to get in touch with the bank repeatedly after this announcement to ask how in the world that was even possible, and the previously-responsive contacts there never would answer their phone again.
I really can’t tell you how lenders do what they do, or why they do certain things, or what their laws and restrictions are, but somehow it almost always turns out that when a buyer I know uses a lender or bank that doesn’t work as much with investors, the deal gets killed. I can’t explain it. On the reverse, anytime a buyer uses an investor-friendly lender (confirmed because either I know the lender or the lender speaks very well to their experience with investors), the deal goes just about as smoothly as any deal can.
How Do You Know if a Lender is Investor-Friendly?
As with any other team member, the best way is to ask other investors for referrals. You can definitely ask here on BiggerPockets. Another great place to find investor-friendly lenders is to attend your local REIA meetings as I know every time I’ve ever been to one, there are always one or a few lenders lingering around looking for business.
Note: Remember, lenders are licensed per state, so not all lenders can work in all of the states. So be sure when you ask for a referral that you are telling people what state the property is in. Which state you live in doesn’t matter, it matters where the property is.
If you can’t find a referral for where you are trying to buy, start calling around. Skip the big banks and start with smaller ones. When you talk to them on the phone, ask:
- What % of their clients are investors.
- What % of their investment property loans actually close (huge question! Because how many they work with could be 1,000 but if only 1 closes, that’s heinous.)
- Ask the options for investment property loans that they can offer. Investment property loans are different than loans for primary homebuyers, so they should be able to speak to this in detail.
- A really cool question you can ask is- do they help their clients much with strategic planning in terms of loans? Every investor-friendly lender I know is very good at helping their clients put a plan together ahead of time for how best to acquire as many properties as they are hoping to ultimately buy. As you know, there is a limit to how many mortgages you can accumulate. So if you are planning to buy more than one, figure out your game plan ahead of time so you know what to expect as you continue to get mortgages.
A couple disclaimers to this article:
- As it is quite obvious at this point, I have no idea the internal workings of the mortgage system. Why or how it can vary between lenders, I have no idea, I just know it does.
- I am referring solely to traditional-style mortgages for this article. I am not familiar with foreclosure or non-standard property types as far as funding them, hard money lenders or other styles of lending, so I am speaking strictly to mortgages on regular purchases.
Know that when someone recommends a lender to you to use for a property, it is unlikely they are referring you to that lender for any kind of referral fee or kickback because legally lenders can’t pay out referral fees anyway. The reason people will recommend some lenders over another is based on their experience with the lender and knowing that deals that lender handles typically go through. It’s a big deal! No pun intended.
Comment below with your lender experiences!