How to Ask For a Commercial Real Estate Loan

Most investors don't use all of their own resources to do their deals, and in many instances, borrowing money from lenders is not only necessary but makes the most sense financially.  However, it is important to note that the Underwriters of any lender will want to have a clear and complete picture of the property you want a loan for and it is entirely up to you as the proposed Borrower to paint that picture in the most complete and honest terms and nothing less is professionally acceptable.  

The correct way to put this package together is to attempt to sit in the Underwriter's shoes and think about what they will want to know to review your loan application properly.

The package needed is as follows:

• A detailed description of the deal and the property
• Include as many color pictures of the property as possible to show as much of the property as you can
• Aerial map of the property
• A copy of the Letter of Intent (LOI) or Purchase and Sale Agreement (PSA) (if available)
• Important dates should be highlighted, such as when the due diligence period ends, the closing date and what day the financing contingency expires
• 2-3 years of financial statements for the property
• Current rent roll
• Current profit and loss statement (year to date)
• A detailed Operating Plan, explaining how you will operate the property.  Include such things as explaining how you intend to keep the tenants that are there, and/or how you intend to fill vacancies, repairs etc.  Include further explanations such as break-even analysis, and how the lender will be paid back.  
• Include your exit strategy to exit the deal after your planned holding period.
• Your proposed property management company resume showing their level of experience and past and current work.  Ensure that your property management company's marketing plan is included
• 5 year Pro Forma projections to be included 
• Your resume

The interesting thing about the above is if you put this package together, you will answer just about any question that the Loan Underwriter will have  The Underwriter will want to know these details, so wouldn't it be great if we provided all that information in the package so that they don't waste their time having to ask us for it later???

You can get excellent aerial maps by going to Earth.Google.com.

Ensure in your description of the deal to highlight all of the strengths of the property, such as high occupancy, being close to an expressway / main road, high traffic, good neighborhood.  Include as many positive features of the property as  you can determine.  Remember, the Underwriter is human and may not be familiar with the area and even some very obvious things to you may not appear obvious to them, so ensure these pluses are noted.  Also recall that they are weighing the risk of lending to you so provide as much information as possible to help them do their risk analysis.

By following through in a professional manner as has been described, your loan will stand above others and will have a better chance for approval as a result of being thorough up front.

Until next time, make it a great day!

Interest Rates and their Effect on Real Estate

So apparently, it seems that the market is heating up.  Prices are on the rise (or so the media does report), but they tend to only report averages and that may not be applicable to your particular market focus areas.  The best thing to do is keep track of sales prices in your area.  Finding recent sales prices in your market is very easy compared to just a few years ago.  This will help you obtain market trends for your area and give you a focus rather than listening to the "averages" being thrown out there by the media.

Record low interest rates are allowing more qualified buyers into the market and the perception that prices are on the rise is really a good thing for the economy and it may well turn out to be a self-fulfilling prophecy.  Time will certainly tell....

Be on the lookout for higher interest rates on the horizon, but in my opinion, those are still far away.  I am not a fortune teller but through deductive reasoning, it follows that with the economy on the whole still not functioning on all cylinders with unemployment much higher than anyone wants, large interest rate increases are not coming yet.  Interest rates will however rise as a necessity to cool off an increasingly heated economy when that begins to happen but also to allow the government to pay down debt with lower cost dollars.  Because interest rates are so low now, a 1% rise in rates now will have a significantly higher impact on affordability than a 1% rise if interest rates were higher.  Let me explain (numbers rounded for ease of viewing):


Example A

On a $100,000 loan at 4%, the monthly payment is = $477
............................at 5%, the monthly payment is = $537         

% payment increase = $537 - $477  = 0.12576 = 12.58%   
                                      $477

Example B

On a $100,000 loan at 14%, the monthly payment is = $1,185
................................15%, the monthly payment is = $1,264

% payment increase = $1,264 - $1,185  = 0.06666 = 6.67%    
                                      $1,185

Notice immediately that a 1% interest rate hike in Example A has a substantially higher impact on the monthly loan payment as a percentage than it does with the same hike of 1% in Example B.  It follows that as interest rates rise, a 1% rate hike will have less and less impact as a percentage on the payment.  Yes the payments are higher as interest rates rise, but the impact as a % is less as rates rise.  Conversely, when interest rates go down, the impact on the monthly loan payment is substantially higher.

Those homeowners and commercial property owners that are "betting" on low interest rates to make ends meet are potentially going to be shocked as interest rates rise because of the mathematics shown above.  Taking action to manage your real estate holdings to ensure that interest rates do not hurt you is very important at this time more than perhaps ever before.

On another general note, as a percentage of GDP, although the US National Debt is considered high by just about any observer, it is not as high as it was at the end of the second world war (see article)   http://en.wikipedia.org/wiki/National_debt_of_the_United_States.  I am simply presenting this information as a reflection of ratios and not total dollars because in my view, ratios tell the story better than total dollars owed.

Low interest rates are great if managed properly and by making provisions for interest rate increases that are definitely on the horizon, we can make the transition to a higher interest rate climate with less difficulty.

Until next time.....

Now That Is Too Good To Be True!

Don't Let This Be Your Expression - Trust but Verify

I am amazed at how many people always believe that if it sounds too good to be true, then it's not true.  Do you fall into this non-belief category?

Let me give you three examples and you tell me whether it's too good to be true?

1) We bought a property for $80,000 and sold it for $140,000 with a holding time of less than 2 weeks.

2) We bought a property for $27,000 and sold it for $85,000 with a holding time of about 3 months.  

In both cases we did nothing to the property and simply flipped it.

Too good to be true?  Must be a scam?  No way, Jose!?

Well, it's completely true and we have the HUD-1's to prove it.  These are just two examples of many, many deals we've done.

Still think the same about "Too Good To Be True"?

We recently also had a high profile investor tell us that a 500+ unit deal we had for $4,000,000 with 80+% occupancy was too good to be true and he completely balked at even looking at the financials?!!!  Let me reiterate:  If it sounds too good to be true, then at least do your own due diligence to confirm or deny whether there is truth or not in the deal being presented.  Not doing a simple due diligence may cost you thousands, hundreds of thousands or even millions of dollars in lost profit.  Play things smart and follow Ronald Reagan's approach..."Trust but verify".  Don't immediately pass on a deal if the numbers sounds amazing.  They actually just may be true and by acting rather than passing, you are the one that will make the money and not your competition.

Until next time......

Getting the Deal Closed

As I'm sure we've all experienced, the Buyer comes to the table with an Offer and we think the terms and price are good, so we agree to move forward but the deal doesn't end up closing.  What can we do to avoid this unpleasant result?  

Ideally, the Buyer should have a very short due diligence (DD) period to limit their control on the property.  Then they should close within days of the DD period expiring.  The reason is that we do not want our property tied up for any extended period of time because there is always a possibility that we will miss another deal.  This is why it's crucial to do our own due diligence on our Buyers.  Do they have the ability to close?  Are they serious?  Will they close?  These are all questions that we need answered before we agree to a contract and what they say is not necessarily the truth, so we need to dig further and ensure that we have a solid deal when we sign that contract to sell.

Ask for proof of funds at the time of Offer.  As our deals are always solid for the investor, we ask for non-refundable earnest money deposits as well.  Yes, non-refundable!  If the Buyer sees they are getting a "smoking" deal, then they should have no difficulty with this and should really do their due diligence prior to contract.  By providing a non-refundable EM deposit, they are showing they are serious and in this case it's probably not necessary to ask for proof of funds, just ensure that the due diligence period is reasonably short such as 3-5 business days.  This is enough time for an inspection, which should be the only contingency they need to be satisfied with.  Now if they don't close, they pay a penalty by forfeiting their EM deposit.  We must of course provide Clear & Marketable Title and this is the Closing Attorney's job.  Once this is confirmed, the deal is then firm and the Buyer must proceed with Closing by providing balance of funds and we then transfer title to them at Closing.  If they don't Close then, then we do have legal recourse if we choose (consult with your Closing Attorney for options if your Buyer does not Close but has waived all conditions / contingencies).  It's probably best to move on if this happens and at least you have the EM deposit as a penalty paid to you for wasting your time.

You don't have to ask for non-refundable EM deposits, but it doesn't hurt to do so and is indeed a preferred method of showing how serious the Buyer really is.  It shows commitment and that the Buyer is serious.  Refundable EM deposits are good as well as long as the contract due diligence period is not protracted to the benefit of the Buyer and the detriment of the Seller (in our example, YOU).

It's always best to deal with cash Buyers (theirs or someone else's, such as a hard money lender).  

Hope this helps with the thought process of getting the next deal closed quickly and avoiding the walk-away non-serious Buyer who is looking to flip your deal and does not intend to buy at all, or a similar type of person.

Until next time.....

Valuation - Understand Your Asset Before Buying

Valuation and the clear understanding of how this pertains to your asset is a fundamental requirement BEFORE buying.  Many people know this concept, but many also do not understand how to determine this to the best of their ability.

As was said before, confirmation of value is the responsibility of the Buyer and not the Seller.  Sellers motivation and Buyers motivations are clearly different, so it is clear that the Buyer must have a clear understanding of value.  When considering an acquisition that you simply wish to flip or rehab and flip, you must buy low enough to allow a reasonable profit.  However, what is typically missed in this course of events is how to value a property for purchase.

Let's consider some methods to help arrive at a value:  

1) You can go to websites like Zillow, eppraisal, or Trulia etc.  In fact there are many of these websites.  However, as seasoned investors know, you cannot determine the value of a property through some simple or complex mathematical algorithm.  This is simply not reality.  Those investors that take these valuations from these websites as law will eventually get into trouble and could be subject to significant losses as a result of believing these numbers.  Truly, I do not intend to put these sites down for providing this "data", however I do want to make it clear that it is in my opinion a negative for new investors because they are first, taking an algorithm's word for valuation and second, they are relying on a third party that has likely never walked through the property, understood the neighborhood dynamics, or noted any other affecting issues that would impact value.  These as a whole may point one in the wrong direction on a property.  This is why it is extremely important to have a feel for comparable sales in the area and then understand the condition of the property relative to these comps.  Only then can you have a good gauge of value and thus be able to make the difference between a good and a bad acquisition.  Website "value" numbers such as those on Zillow, eappraisal, Trulia etc. may serve as a basis only at the very best but in many instances do not even provide a basis.  Being in tune and fully aware of what properties are worth in your target market is crucial to you as an investor.

2) You can get comps from a Realtor or Licensed Appraiser.  These could cost you money or they may not.  Depending on how cooperative a relationship you have with one of these professionals can make the difference between having good or bad information.  Ideally, one should go to a Licensed Appraiser to pull comps.  The reason is that Realtors are motivated by commission whereas Appraisers are not.  I am not suggesting that Realtors may steer you wrong, only that to avoid such a possibility, it's best to go to an Appraiser to pull comps, especially in this continuing volatile marketplace.

3) Once you understand the condition of the property you are looking to acquire, after physically walking through or having someone you trust do the same,  have comps in hand and a good understanding of the neighborhood and potential future impacts in the area, you are then armed with information that will help you determine value.

As simple as it may sound at this point, picking a proposed market value based on the knowledge you've acquired, you simply subtract the cost of acquisition and cost of repairs to arrive at your maximum profit.  Of course, do not expect the maximum as there will be marketing costs to consider as well as negotiation downward from your Buyers as they have the objective of buying as low as possible contrary to your objective of getting the most out of the property.  If you follow these simple guidelines and build yourself a good "pad", you will make money and very much lower your probability of a potential loss financially.

Until next time.........

Flipping a Property (Reality vs What's in "books")

Happy 2013 Everyone!


This article is mostly for new people but other more experienced investors may learn some amazing tidbits here for free!  The next couple of minutes can literally save you thousands of dollars and countless hours of time.  Seriously...read on, it will be worth it.

If you're a typical real estate investor, you'll go to seminars, buy books, read everything you can on the subject, and then hear about stories where someone bought an apartment complex with no money and flipped it for a million dollar profit overnight using transactional funding!  Now you want to try something similar because you are soooo smart with your knowledge :) Now isn't that special?!  It's also unrealistic and if it did indeed happen, it was a complete fluke of astronomical proportion luck.  How do you think I know that?  From plenty of real life deals and experience, that's how.  MLS deals are the worst to deal with because there's just too much public information.  Off-market deals are better if you're selling to a homeowner, but if you're selling to an investor, the first thing they are going to check is how much you paid for the property!  Yep!  That's exactly what they are going to do.

Here's the reality folks:  The buyer wants to know how much you're making, no matter how stupid that may sound, that is the complete, honest reality of life.  And they'll find out in the HUD-1, won't they?  If you're not sure, go get a copy of a completed transaction HUD-1 and look at it closely.  The buyer will see "your" money.  So it doesn't matter whether you are using transactional funding or not.  The money distribution is on the HUD-1.

It's unfortunate, but you can rest assured that all buyers will look at the HUD-1 when it comes time to close and if they think you're making too much, your deal is dead.  If you're going to be making a significant gain on your deal, then you have to negotiate that ahead of time and make it completely clear to all parties.  I'm not talking about $10k profit.  That's reasonable and not necessary to discuss with the buyer, but if you're flipping an apartment complex for say a $500,000 or $1,000,000 profit on a quick flip without adding any value, then you are probably doomed to failure unless you can negotiate that up front.  

However, what I am writing in these short paragraphs that's free to you will save you a lot of time and money if you heed my advice.  

If you're expecting to make a significant sum on the deal, work out "your" money ahead of time and make sure it's ok with the buyer, otherwise when you're selling, you could get all the way to closing table and the buyer will likely back out if they think your side of the ledger is getting too much money, regardless of whether they are getting a smoking great deal or not.  Doesn't that sound counter-intuitive?  Absolutely, but people are funny and that's how people (buyers) think, make no mistake about it!  If you don't believe me, go do a deal where on paper, you make a ton of cash in a quick flip!  If it works, then I'd love to know your secret, but I would venture a guess that the probability is 99.99999% that you will fail at this endeavor.  Quick flips for big money are highly unlikely using conventional methods. 

Psychology plays a big part in real estate because you have to remember, that this is a people business and not a property business.  Always remember psychology comes first, and the deal comes second.

All the best in the New Year!

One Good Definition of Stupidity in Real Estate

I really don't have time for b.s.  If you're a real buyer, you don't either.  I've covered this topic before, but I really hope that hitting the same topic again will hit at least a few Sellers and shake their thought process up.

Let's talk to the Sellers:

Dear Seller,

It is your responsibility to demonstrate that you have something of value to your proposed Buyer.  If you control it or own it, you should have no trouble providing any of the information needed for a prudent Buyer to evaluate your deal.  Asking us for a proof of funds before demonstrating value proves nothing to us.  It actually doesn't do anything for you either because if you don't have something of value to sell, then you won't sell it and all you'll have is a nice proof of funds.  Do you really think you'll have anything else if you don't have something of value?  If you do, then I suggest you go to Dr. Phil's website and ask to be on the show.

Respectfully,

The Buyers

Now for some this may seem like a rant, but really it's not.  What it is, is a demonstration of reality and as such as reality check for those involved in this business.  If you don't have something good to sell, nobody will buy it, so stop asking for proof of funds before you demonstrate that value Mr / Mrs / Ms Seller.  Once you have an offer on the table, then you have a right to ask for a POF, but not ever before.

Now, I hope all of you Buyers and "REAL SELLERS" enjoyed that.

Until next time....