Bank financing your deals

[George Christo]

I was excited last month to open my copy of The Real Deal and find that I was listed as one of the seven most active developers in North Shore Staten Island. Seeing this in print really made me take a moment to pause and reflect on my career. I realized during this moment that the work I’ve done in St. George Staten Island and other areas wouldn’t have been possible if I wasn’t able to get funding. Funding, along with inspiration and innovation, truly is the lifeblood of real estate development.

If you want to start flipping real estate and need money, Just any banks aren't the place to go unless you have an equity line of credit. Instead, you either have to go with traditional methods such as asking family and friends for help, or you have to think outside the box and consider approaches like peer-to-peer lending and crowd funding. For those who have a primary source of income that can support the debt, a loan might still be possible.

 I have two pieces of advice when you start contacting banks:

1. Your best bet is a smaller bank since they take a more personalized approach to underwriting loans.
2. Make a list of banks to contact and put them in ascending order of importance (listing the banks you favor at the bottom). The reason you don’t want to call the most important (or preferred) banks first is that you’re going to use all the first phone calls as a learning process so you can get your pitch down and sound like you know what you’re talking about by the time you reach the banks you really care about.

There’s a reason it’s difficult to secure loans. Every form of bank lending is basically a product. Products created by the banks expose them to certain risks. The risker the transaction, the more the interest the borrower will pay. Finding the bank that has a product for your needs is a matter of time spent dialing and asking.

But there are things you can do to increase your likelihood of securing funding. Packaging your deals correctly is very important. In fact, it’s a major factor in your ability to successfully raise money. Ultimately, your deal has got to make “cents.” So stop, drop and roll up your sleeves. This is where it gets fun.

I can't predict markets but I can determine if a deal has value-money. I consider the rental market. I consider population growth in an area and the city programs available that can subsidize property debt. Then it's the final cost of the project and the income it generates. Most local real estate investors purchase at X. They assume a construction cost or renovation cost at Y. The sum of X and Y is the development cost. They then subtract what they determine the value (V) will be on comparable sales and assume the difference is their profit. (X+Y) - V=P. This packaging method can work in an up or lateral trading market but what happens when the market goes down? The developer’s carrying debt until they sell. This means that they have overextended their ability to compete and market into the wave.

Don't get me wrong, this method can be a small portion of your portfolio and you’ll be able to brush it off—but if it’s a large part of your plan, it could easily end in catastrophe. This applies to both large and small investors. For small- to mid-tier investors, those who have no room for error, it’s much better to always purchase with the rental approach. It might seem difficult but it sure provides sustainability and is perfect for those who aren’t looking to get rich quick but to instead create wealth.

I know the longer you wait, the more you feel like you’re missing the boat—but rest assured, you don’t have to be in now to make profits later. I watched a market boom go by from 2000-2006. Yet I stayed focused believing in my approach. Find ways to encourage your difficult decisions and be selective of the people you spend time with. 

George Christo