Meeting with the Banks

As I’ve mentioned in previous posts, my biggest obstacle to be able to scale my real estate efforts is the difficulty I’ll face in getting loans. I have some cash in the bank, and I have great credit, but without income (I quit my job, remember), it’s very difficult to qualify for loans these days. Especially real estate loans!

One option I have is to partner with someone who has income and can co-sign for loans. While I would certainly consider this alternative if that partner were also either going invest cash in my business or actually work with me on deals, I’m not thrilled with the idea of giving out equity to a partner who only is going to be used to co-sign loans; I’m not sure it’s worth giving away 15-25% of my profits just so I can get financing. While I previously considered partnering with a contractor friend of mine who was hoping to bring both cash and credit (the ability to co-sign) to the business, it turns out he isn’t able to provide either. So, while I very well may sub-contract him to help me out on some projects, it doesn’t look like we’ll be partnering just yet…and I still have the problem with the loans.

Some other investors I’ve spoken with have suggested that I may want to meet with some local banks in my area (these banks service their own loans, so they can choose to loan to someone like me if they want to, without having to jump through hoops or deal with red tape), and figure out if there is any way they’ll work with me. So today, I threw on some nice pants and button-down shirt, and visited a couple local banks. The response I got wasn’t as bad as expected…

First, I met with my current financial institution, a big national bank that I promise everyone has heard of. As expected, they said there probably wasn’t anything they could do for me, but they did give me the name of the regional commercial loan coordinator to speak with, in cash she could figure out something creative.

Next, I went to a local bank down the street that currently has about 4 branches altogether. I’m quite certain they service their own loans, so if they really wanted to loan to me, they could. The gentleman I met with first asked me some basic questions, if I lived in the area, what my business model was, whether I had any experience, etc. Hearing that I had no experience, I think he was about to write me off. But, I pulled out a copy of my business plan and my personal financial statement, and seeing that I had done some preparation and wasn’t just wasting his time, he was happy to continue the conversation. We had a great chat, but in the end, his response was that they may be able to provide some low LTV loans (65-70% of the purchase price), but would only consider it once I had the property(s) purchased and ready to be refinanced.

My last stop was at another local bank; when I walked in, I was the only customer in the bank, and when I asked to speak with someone about “real estate investment loans,” everyone who worked there hesitated, as if they were all hoping they wouldn’t be the one who had to speak with me. Perhaps they have a lot of investors walking in the door these days who they can’t really help. Ultimately, one woman stepped forward and told me that, while she only had a couple minutes until an appointment, she could speak with me. Learning my lesson from the last bank, I immediately pulled out my business plan and personal financial statement, and the woman quickly warmed up to me. She offered to make a copy of the business plan, and when I told her she could keep that copy, she acted surprised and said, “Most people don’t come in here that prepared.” I guess that was a good sign…

We chatted for a few minutes, and after discussing my business model, the volume of loans I’d likely need, and my time frame, she said that, she may be able to arrange some pre-approved financing at about 70% of after-rehab appraised values, assuming I got get tenants using their approved leases and positive cash flow. We set up some time later in the week to review my previous years’ tax returns, and some other financial data, and we’ll go from there. Hopefully we’ll be able to put something together (either commercial financing, lines of credit, or both), but at very least, I’m more confident that when push-comes-to-shove, I’ll be able to get at least some financing on my properties assuming I’m successful at getting tenants with positive cash flow.

I also learned the lesson that most people probably don’t walk into banks prepared with the information the loan officers need (financial statements, business plans, etc). So, having that information prepared will go a long way towards getting the loan officer to really take you seriously…