Mentor 9- Financing

[Henry Clark]

Read post 1.  

This is a broad discussion.   There are many ways to finance by situation.

A. Sources- personal, collateralized assets, Credit Unions, Conventional Banks, Hard Money Lenders, Relatives, SBA, Farm Credit Service, FHA, VA, BAH,
   
B. Terms of loan- payment terms such as interest rate, balloon payments, amortization period, fixed, variable, ARM, etc.

C.  Lien position

D.  Requirements. Example. Insurance.  Lender will want to be listed as an “Additional Insured”

E.  Strategy-  match short term debt with short term investments and long term debt with long term investments.      

F. Balloon terms- loan is reestablished or renegotiated at that time. Could be a 3 year ARM, 5 year balloon, 7 year balloon. Most loans with a 20/25 or 30 year amort, with say a 5 year balloon payment may have an interest rate maximum increase rider. Example. Can't increase more than 1.5% points. Or no more than 1% above prime.

G.  Cross collateralization.  Most banks will allow you to cross collateralize with othe loans and properties you have with them.   They will not do this with other banks since they would take a second lien position behind the first bank.

H.  Federal lending credit limit.  All banks have an established Federal Lending credit limit.   This is based on the equity to loan positions the bank has. This is constantly moving.  Make sure your bank or institution is large enough to grow with you.      
Once you hit the limit with them they can still do a loan with you, they just have to farm out the debt.   You will not deal with this other bank, only your bank.             
I. Again we are primarily commercial. Someone else can speak more in depth on VA, FHA, etc. I. Appraisals- Most banks will require appraisals. This may cost $500 up to thousands.

J. Basis of appraisal. SFH is normally based on comparable sales prices. Most commercial properties are based on Cost basis, Comparable sales price, Income analysis or operating profit.

K.  Appraiser selected-  the bank will choose the appraiser.    Normally can’t be more than 6 months old or a new appraisal is required.  A different bank will normally require their own appraisal to be performed.

L.  Appraiser accuracy-  not questionable.  If you think there is pertinent info that creates a higher valuation, you need to pass this info up front and not later.  
M.  Accuracy of appraisals.  This sometimes is based on perspective.  I bought 8 acres for $200,000.  Comparable was $600,000.   Appraiser would only go to $210,000 and professionally thought that was a stretch.   They said to wait a year, they just couldn’t increase since I bought 1 month ago.  Building cost basis.  They use historical costs averaging over the last 25 years.  Our building cost went up 40% in the last year.  Comparable Sales price same issue.  Sales prices have doubled in the last 10 years.  If your area hasn’t had sales in several years you’re undervalued.  

N.  Operating income-   You may self manage, the appraiser will put in a cost for a PM.  

There are many other loan discussion angles and topics.

Start small and Make Your Mistakes Early.