Why You Should Not Use Bank or Institutional Financing

[Jackie Lange]

The Legendary investor Jack Miller always advised that when you borrow money, even from a private lender, that you should make the property the SOLE collateral for the loan.

A Bank won't let you do that and that's one of the reason Jack always said no bank loans.

If the investment turns out to be a bad one,or the economy does a flip-flop on you, you can walk away from the property and the loan and it will not hurt your credit if you do not sign personally.

But if you guarantee the loan personally ( YOU), then you could be forced to file bankruptcy to get out of a deal gone south which will ruin your credit for many years to come.

See that happened to this guy who obviously never met Jack Miller:

http://nky.cincinnati.com/article/AB/20110802/NEWS0103/308020074/Hemmer-Jr-files-bankruptcy

[Darryl Dahlen]

I think your reasoning to not use conventional financing is full of extremes and doesn't apply to most who operate within "normal" parameters when it comes to financing.

In reading your reasoning to not use traditional financing I'm reminded of those commercials that make extreme claims in order to promote their product, but state in the fine print that the results are not typical.

Reason I say that is I doubt many here could go out and find zero percent owner-financing and/or 2% private money. It would be nice if they could, but I think those types of deals are akin to needle in the haystack opportunities, not the norm.

Also, while there may be a small pool of lenders who would put their money on the street for 2% I have to really wonder why anyone would do such a thing?

I actually think it is rather foolish to offer money that cheap considering the inherent risks associated with investing in real estate. Not to mention the fact the lender could charge substantially more (7-9%) and still be offering what I'd call cheap private money.

Furthermore, I think using examples of being tossed in the can for using bank financing is a bit of a reach on your part. Perhaps the two you know who got sentenced deserved to be prosecuted. Perhaps not, but I don't think the honest person who obtains a loan has to worry about prison time if the deal goes south.

While the judicial system is catching up with bank fraud, I still marvel at how some of the obvious bad apples are still in operation, haven't been indicted, or got away with a slap on the wrist. I really don't think the honest investor has to lose sleep over the bank going after them providing they are honest.

Lastly, I don't see using the loan process, bank fees (which are often relatively low), or the off chance of the bank coming after the borrower as sound reasons to make the claim one should not use bank financing. It doesn't hold any water (or very little) from where I'm sitting.

Not to say I think banks are easy to get money out of. They're not, but for those who can obtain bank loans I absolutely believe that in most cases the upsides to using bank funds far outweigh the negatives.