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Updated almost 9 years ago, 03/22/2016
Bank application - everything you need to know (imho)
In the last year our little real estate company has submitted quite a few loan applications. We've received plenty of No's and just enough Yes's, but consistently the loan officers are impressed by our Finance Application. Our business includes flips, single and multi family rentals, and both single and multi family new construction so we probably hit most of the BP community in one way or another. I am outlining our approach below in detail because if it helps you then it probably helps us too. Enjoy!
The Phone Call
1. Call the bank and ask to speak with the commercial lending team.
2. Give the 30 second commercial about who we are and what we do.
3. Ask what kinds of loans they are looking for
4. Explain our current need including the project description and financials.
5. Ask if this is something they would consider; if no, ask for a referral. If yes, share personal financials to make sure we're not wasting each other's time.
The Application - project profile
Include everything a loan officer would need in a single document to make a fair assessment. Our "project profiles" include the following
1. Simple cover sheet with the title "Finance Application", our LLC name, the address of the property, 1 line description (e.g. Single Family Home Renovation and Resale), Table of contents, and a footer that says in huge letters "Confidential".
2. The first page includes three sections:
(A) Project Overview with 3-4 sentences describing where it is in Philadelphia, the current property condition, the target renovation, a note about high-end or rental-grade and any features (we go green - so split mini ducts, tankless hot water heaters, etc), and the financials: (i) Acquisition cost, (ii) renovation cost, (iii) ARV estimate. For bigger proposals I've included the "equity contribution" to demonstrate I get that we have to have 25% skin in the game.
(B) Company Overview with 1-2 sentences noting our mission statement (copy / paste from our website) and a note about anyone else we are partnering with (we now often have an equity partner in our projects so we list their LLC name).
(C) Management Overview with a picture of each person and brief bio about each person on the management team. The bio includes their real estate background, their role in the company or on the project, and any specific education or certifications they have (e.g. JD, MBA, General Contractor license).
(Yes, that's right... all that on the first page.)
3. The second page includes a section we call Neighborhood Information. This includes a big huge photo showing how cool the area is, a website link to a helpful webpage about the area (we use www.visitphilly.com for ours because they have a blurb about all the great districts in Philly), key financial statistics including average $/sqf, and median listing $, and then a few more links to helpful pages about that part of town.
4. The third page includes a Financial Overview. This page is split in two:
(A) Project financials for our flips we include both the resale exit and the rental exit, so they see we have more than one viable exit. I am not going to give everything away, but we simply list out under each of those columns (resale column 1, rental column 2) the key data banks want to know such as your cost and expected net pre-tax profit, and for the rentals the NOI and debt service coverage ratio (1.25 is stellar if you can meet that minimum, though not always feasible on a flip). I note on the bottom the assumptions, such as source of rental rates and the expected mortgage terms. On the bottom half of the page
(B) Draw schedule including a table of three columns: draw description and date, details of what is included in that draw (e.g. permits, rough ins), and the cost of that draw including any portion that is our LLC's responsibility and also show the % of the overall draw schedule.
5. The fourth page is where we show the architectural renderings. Ideally this is the final architectural drawing, but in reality it is usually either our near final architectural plans or a 3D rendition one of my partners who is a total tech wizard has cooked up. If we are very early in the design process we will include pictures instead of the drawings or renditions. Some banks don't really care about the plans they care about the financials, but chances are part of their team is going to ask for it so best to include everything in one package.
6. The sixth page includes the details draw schedule which usually means the result of our best estimates after meeting with several builders and drawing on our own experience. If we are further along then we have included the copy of the signed builder's quote. In either case, we are within a 10-15% margin of error and can pull from our own reserves if the finance application is approved and we miscalculated by a reasonable margin. We have also been off by 20% and in that instance the bank increased the loan size (and we had to resubmit the application). The only reason it was feasible though was because the ARV appraisal came in high enough to allow our loan to go up; if that's not the case then your problem is less about the renovation and more about buying a bad deal (or other factors).
7. The seventh page includes our comps analysis for properties sold in the condition we expect our ARV. Google maps allows you to include a picture of a map (just take a screen shot), and we also go to Redfin to capture a picture of the front of the house of each comp. The information in the table includes the basic statistics - beds/baths, total square feet, $/sqf - driving towards an average $/sqf that is multiplied by our ARV sqf to equal the proposed ARV. Sometimes it is above, sometimes it is below, but this approach is always a fair and honest representation rather than a number based on hopes and dreams. My day job is audit and risk management, some of that philosophy no doubt comes through in our application approach.
8. The eighth page is the same but for the as-is comps. This is particularly helpful when you bought the property in cash and the bank you are using will offer you 80% Loan to Value instead of Loan to Cost. We had one project where we had almost no cash in the deal because we picked up the property at such a discount compared to its appraised as-is value.
9. The ninth page is a rental analysis and this goes into greater or lesser detail depending on whether we are including this just to demonstrate the viability of the rental exit for a project intended to be a flip, or if it is a rental project we go into full details of property addresses, conditions, rental rates and note other factors driving towards a rental $/sqf just as above for the ARV.
10. The tenth page includes a single page snapshot of a like project we completed in the past to demonstrate we have the qualifications to be successful. We may include the number of days on market, the terms of the sale, and pictures and the write-up from the listing. In this section we have also included a spreadsheet of all our real estate projects to offer the full breadth of our team's experience.
11. The final pages include copies of the LLC certificate of organization, operating agreement, business license, and other key legal and registration information that should be expected of any company asking to borrow money.
Company and Personal Financials
Finally, in a separate document we will include the financials for the business and the principals. We are still a new company so personal financial statement, two pay stubs, and the last three years of tax returns are expected.
There you go. Two documents with a short covering note in your email that forms the basis of a full and professional application in the humble opinion of an audit and risk management professional - and a nights & weekends flipper with big ambitions.