Lenders are an essential business partner in any real estate venture. They take many forms, such as banks, credit unions, or private entities, but it is important to understand that the lender's relationship with you, your business, and the property in question, is unique and must be managed carefully.
Have you heard this before?
“Lenders have to listen to every answer, but they don't ask every question.”
I’ve heard this phrase more times than I can count, from both current and former loan officers. But what does it mean? My interpretation is that every lender has a very specific checklist of requirements that they need in order to satisfy their underwriting requirements.
Unlike an equity partner, who might want every detail of a property, your plan, and all the potential pitfalls of the investment, lenders are seeking to satisfy their underwriting requirements—nothing more, nothing less. If it doesn’t apply to closing the loan, it’s extraneous information to them. But that doesn’t mean it can't hurt your application.
This is not an invitation to deliberately conceal the truth about a property. But because lenders have more downside than upside in this deal, it is important to focus on and accentuate all the stable aspects of your property when speaking with them, rather than talking about the great capital improvements you can make to increase cash flow and stabilized value.
As a case study, imagine a potential mobile home park acquisition that involves a 30-unit property with excess land that could potentially accommodate another 10 units. For an equity investor, I would place a heavy emphasis on the potential upside of this property, such as the land and opportunity to expand (and, by extension, the added value of increased operational efficiency).
A lender, on the other hand, only sees this type of capital improvement as added risk. Offering up this information could lead to questions like, What happens if there is a permit delay? Will the construction adversely impact the existing units? What about utility access? Again, it is imperative to be forthright and truthful about operations plans to your lender. In this circumstance, however, I would place more of an emphasis on attributes that are attractive to lenders, like the existing cash flow of the property, the longevity of the current tenant base, and the good condition of the in-place infrastructure. You could still mention the capital upgrades, but presented like this: “There is some additional upside in adding units, but the business plan doesn’t rely on this and its pure upside.”
In either case, start by listening.
When dealing with any lender, the first step to understanding is listening. Pay close attention to what the person is saying, ask clarifying questions about the information being communicated and be very responsive with specific information that relates directly to the questions they are asking. By allowing the loan officer to lead the conversation, you can easily guide your responses to stay within the bounds of the information required, rather than steering into avenues that don’t need to be explored.
Outside the lending process, this strategy can apply in other areas, too. Taking an “active listening” position is an excellent way to engage in conversation with anyone in real estate and beyond.
[1] I will place a heavy disclaimer on this entire publication that I am NOT a tax or legal professional, and this writing is purely a work of my experience and opinion. Before embarking on any real estate lending venture consult with qualified legal and tax professionals