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…Three Conversational Points That Have Banks and Lenders Fighting Over Borrowers…

 Source: Bristol Mortgage It is not unanimity anymore about what the Federal Funds Rate experts have in store. In 2016 the conversation between many economists and other pundits was mainly about when a hike in rate was going to take place, and in the last quarter it inevitably happened. In an article on my blog titled, “The Most Important Commercial Real Estate Trends in Review 2016 and Expectation for 2017” there is a section about why rates will continue to rise in 2017. Not only rates rose at the end of fiscal year 2017 by 25 basis point than previous year, but the rise also continued to in 2018. In fact, many Fed officials advised that rates will rise to a range of 2.25 to 2.5 percent by the end of fiscal year 2018. While this space against inflation has raised concerns, for a borrower, the consideration of how moderate rate increase may impact a transaction that is already in the works is essential.  In fact, it is more important for your long term business strategies and real estate assets.

In this article I want to reaffirm to the reader why now is the time to reach out to the right lenders that will most likely issue debt placement for your property and how fostering a strong relationship must be prioritized. Keep in mind that sudden changes in the economic environment, capital markets, and real estate cycles will not always bode well for the exact type of financing you are seeking. Does it exist? Absolutely! However, there may be certain risks that are associated with your property and other circumstances which could make it difficult for some lenders to finance your asset. As such, the following three conversational points must be considered and are extremely critical in determining the best financing options.

Liquidity: This refers to your ability to sell your property and how much of an investment can be issued for it at a point in time – let say 7 years after the holding period (i.e. you bought the property in 2012 and in 2019 you plan on selling it). Now, as wonderful as real estate is, unfortunately there are two agents called, “volatility” and “economic shock.” When many things go terrible in real estate, prices tend to dry up, and it becomes difficult to acquire and dispose of properties. The stock market is different, and having some form of liquidity that is accessible rather quickly to use for real estate transactions is not terrible.  Basically, lenders want to see some form of liquidity, and that you have the capability to at least invest seed capital, 10%+ of equity in a transaction.

Credit: Credit plays a role in in the function of risk premium (a combination of liquidity and credit), and is a major conversational pointer that a lender will focus on when you rare seeking debt placement.  By credit here I am not only referring to credit score, whether it is 650 or 800 but also how solid the current and projected cash flows for the property are.  Government Sponsored Agencies such as Freddie Mac and Fannie Mae now require that credit report reflect data from all three major credit bureaus – Experian, Equifax, and TransUnion. What does that mean? Due to more stringent underwriting standards by banks, lenders, and higher default risks that may be associated with credit issues, it is paramount that borrowers pay closer attention to their credit history, and strengthen it over time. That creates better upsides for financing and refinancing your property.

What should you do then? Each year make sure you get a report of your credit file (a free and legitimate platform to access your credit file is www.annualcreditreport.com) whether it is personal or business to analyze the strengths and weaknesses and have a strategy to augment your Fair, Isaac and Company (FICO) score. Here are two other ways you can increase your FICO score reasonably fast by 30 to 40 points: (1) Keep all your credit cards at less than 30% of their account balances (i.e. a credit card with a credit limit of $10,000 should use available cash of $3,000 or less) for six months straight; (2) Pay your mortgage payments, utilities and maintenance services 7 to 10 days prior to their due balance. This will ensure that your payments are not posted on the bank’s accounting payable too late. Great! what if you have no credit grid (i.e. no credit cards, no loans, etc.) whether by choice or necessity? In this case, keeping track of your paid rents, utilities, property taxes, and phone bills will be vital.

Skin in The Game: Commercial real estate financing has thousands of industry lingoes – basically, its own language, just like in any other field.  This is a term that is most often used where debt is being procured by a sponsor from a financial institution. Conceptually, all it means is “How much money, actual cash, does Borrower Y has invested, can invest in the property?”  For instance, Mrs. Buyer wants to acquire a mixed-use property in a secondary market in Plenty of Debt town, for $10M. The bank tells Mrs. Buyer, “That’s a wonderful property. Do you own others like it in this market? One more thing, do you have $2M, 20% for a down payment in cash? This is more of an assurance that the borrower, in this case Mrs. Buyer is more committed to the project. In any event, lenders strongly admire the skin in the game aphrodisiac.

Ultimately, banks and lenders do not view financing a property as emotional elation, but rather as an asset that can issue positive risk adjusted returns in the long run where both sides are content with the transaction. In other words, lenders want to build strong relationship with strong borrowers, who understand and admire the importance of these three crucial conversational points when financing a deal.

By: Ibsen Alexandre

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Ibsen Alexandre offers his opinions about real estate finance, business, and investment at www.Refivest.Com and other real estate publications. He can be reached at ibalexandre@refivest.com

The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation for investments nor lending.

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