Real Estate Investing Adventures

I remember when I landed my first job out of college. It was a good job with good pay. I thought I had it made. I was living away from my family in another state. Christmas was coming and I didn’t have any extra money for gifts and I just thought I would go down to the bank and borrow $1,000 for gifts and travel money. To my surprise, the banks would be happy to lend me $1,000 if I had a thousand dollars in liquid assets, otherwise I was out of luck. I don’t think they quite understood that if I had a thousand dollars somewhere else, I wouldn’t need to borrow a thousand in the first place! Maybe they did.

The Need for Good Credit

Remember my previous post about having good credit? Flash forward to the present. My partner and I called up three large banks and asked to speak to their commercial loan officer. We told them that we wanted to borrow between $1.5 million and $1.8 million for a real estate development deal and asked if we could meet and discuss our plans. All three bankers met us for lunch and picked up the tab! Now I will admit that this was before the subprime mortgage meltdown and credit was easier to get. However, on my most recent projects, I still have no problem getting financing because my credit is good and I only bring deals with good numbers to the banks. In other words, I don’t waste their time.

Real Estate Financing - Putting Your Best Foot Forward

Listen, getting financing is never easy. You need to make sure you always appear professional and competent. So how exactly did we approach the banks? When we met with each individual banker we were dressed professionally. We looked the part of successful developers. Then we let them know we were talking with three banks and let them also know who their competitors were. It’s human nature to want something someone else wants. Lesson learned - banks need your business and they will compete on rates and terms. We gave a general overview of the project, the timeline, our combined financial strength (another reason for a partner) and the terms we were looking for and asked if they would be interested in the opportunity.

One of the terms that I was adamant about was that we did not want a typical construction loan where we did the work, the bank then sent out an inspector and then they released some portion of the funds. We wanted the ability to pick up the phone at any time and request the bank deposit the funds in our account up to the loan amount. We did not want to have fund the cashflow and wanted the ability to make quick payments if necessary to obtain the best pricing. One bank of the three couldn’t agree to that scenario leaving two banks still wanting the loan.

We sent the remaining two banks a “loan package”. This package consisted of:

• Executive Summary
• Pro Forma Analysis for the Investment
• Developer’s Experience
• Developer’s Financial Strength
• Due Diligence Investigation

This package took some work. One of my previous posts discussed always being ready to do business. We learned this the hard way. We had to pull all this information together last minute.

Line of Credit 

We asked them to respond with a commitment letter outlining the loan terms. What a surprise when we received the commitment letters. One bank offered us a line of credit for $1,250,000 for 24 months interest only at LIBOR plus 1.70%. These were great terms. They were fantastic terms. In talking to the loan officer, we discovered that this bank was the lead bank in the bank consortium financing the entire development we wanted to build in. Lesson learned - If you are building in another development, talk to the lead bank funding that development. They have a vested interest in making the development successful.

These terms allowed us to put very little equity into the deal and gave us the freedom to withdraw money as needed without an approval process. Future posts will discuss what it actually took to close on this line of credit and what happened when the approved line of credit ended up not being enough!