I have been buying commercial real estate for nearly 20 years, and each investment has involved the use of leverage, taking out a bank loan for as much of the purchase price as possible to increase the investors’ cash-on-cash returns. These days it’s harder than it’s ever been because of the close relationship between high interest rates and stubbornly high prices for the best properties.
But that’s just the numbers, and it’s pretty easy to tell if a deal will make sense based on the numbers. What we’ve recently discovered is that as lenders get more restrictive on what they will charge for such a purchase, other marginal lenders often step in to pick up the transactions that investors pass on because the numbers don’t work out. Enter the opportunity for less sophisticated lenders, like credit unions. As it turns out, these lenders that are traditionally used to lending for the purchase of cars and personal residences can get in over their heads in commercial real estate. And guess who bears the pain of their inexperience – the borrower.
How do I know this? Because I’m the borrower who is engaged with such a lender on a current deal that has been extended twice due to the underwriting team’s inability to efficiently accumulate and evaluate the information needed to make a reasonable credit decision. They have made nearly a dozen separate requests for information, each one only coming after the last batch was received, with no indication of when the entire wish list will end. And on top of that, their most recent request was for the never-before-requested credit reports of my co-trustee, which were frozen for security purposes (as are yours we hope). As requested, we lifted the freeze and so advised them. Nearly a week later we were told they couldn’t access the credit reports because they were still frozen. So, my co-trustee went into their credit bureau files yet again, determined that the files were still unfrozen and available, and that the lender’s staff apparently just didn’t know how to access them. This from an organization that is typically regarded as a respected financial institution, as are most credit unions.
I don’t yet know how the story will end, but my message to you – should you be seeking a reasonably priced loan in today’s market – is this: Qualifying for a loan is more than your satisfying a lender that you’re a good borrower. You need to satisfy yourself that the lender is a good lender. Questions you should ask before you start working with any real estate lender:
- How much of their business is lending for the kind of property you want to buy?
- How long have they been lending on this kind of property?
- How does their credit committee/underwriting process work?
- How does their rate lock process work?
- How long would you expect the entire process to take, based on past experience?
If any of their answers are troubling, or equivocal, I urge you to actively consider finding another lender. You could save yourself a great deal of aggravation (I say to myself now) and at the same time send the message to the would-be lender that you are not willing to tolerate their lack of experience by letting them learn at your expense. Be assured there are other options that will work better for you. How do I know this? I’ve been learning for a couple decades, and I just learned something new. And now you did too.
When all is said and done, we are still Your CFO for Rent.
