Real Estate Investing Adventures

Meeting with the Bank

From our previous post on this development you will recall that we just found out we couldn’t build the building we wanted and keep it close to our 3,200 SF we had in our initial financial model. We decided that the first step in figuring out whether to build the bigger building or drastically change our initial concept was to see if we could get additional funding. If the bank wouldn’t lend us additional funds, it made no sense investigating that option any further. We sure couldn’t afford to put $250,000 more of equity into the deal.

Our meeting with the bank was a tough and embarrassing discussion. We had originally presented a plan where funding of $1,250,000 would be sufficient. Now we were telling them that we needed significantly more money. We couldn’t tell them how much yet. We just wanted to know how much additional funding they would lend us. We couched it in a story that we thought the market might be right for a much larger and higher end home. However, before we investigated that option, we needed the bank to tell us if we could get the funding.

If there is one thing bankers are not, bankers are not dumb. You want to be treated like a professional and develop that reputation? Don’t go bust your deal and then go back and ask for additional money. The banker cut right to the heart of the issue with one question. “If you don’t get this additional funding, what are you going to do?” Our honest answer was, “We don’t know.” The banker told us he would be back to us in a few days.

Developing an Accurate Real Estate Investment Model

To get a better handle on our numbers we needed two things:

1. The final concept drawings showing the layouts and typical materials
2. An initial estimate of the construction costs from the contractor

We pushed the architect hard to produce the drawings with the changes we had discussed previously. We also needed a finish schedule for the building so the contractor could put a reasonably accurate price on the construction. Then we let the contractor know we needed a decent construction estimate with sub quotes for the major trades. This is earlier than typically done, but there was no way we could go to the bank a third time. We needed a real number now.

Our Banker Responds On Financing

We received the call from our banker. He essentially told us that if it wasn’t for the fact that they were the lead bank in the development we were building in and had a vested interest in its success, we probably would not be getting the additional funding. You just don’t keep going back to the well. He let us know that he would finance a $1,700,000 line of credit under the same term as previously arranged. However, our development would have to appraise for that value. We needed to get his appraiser a set of drawings and specifications and give him access to our contractor and designer.

The ball was now in our court. Were we willing to risk that much money for this real estate development? Time to make a decision on whether we thought the market would respond to a home north of $2,000,000.

Market Analysis

We didn’t have relationships with the buyers in this development, but the real estate agents working for the development did. They met with prospective buyers daily. We told them of our potential plans and received a luke warm response at best. They wanted our listing when we were ready to market the building, so they didn’t want to be too discouraging. After pushing hard with a number of direct questions, most of them didn’t think anything above around $1.8 million would sell. This is how we set the numbers in our initial financial model.

There were two outside real estate agents also dealing with high-end homes on that particular lake. They thought we may be able to push it to $2.0 million, but anything higher than that just didn’t have the customer base in this area.

We hadn’t run our revised financial model yet, but we doubted even $2.0 million would give us the profit we were looking for with this size house. My next post will walk through our revised financial model and the decision we made as to continuing with this real estate investment.