Why You Shouldn't Trust Your Banker as Far as You Can Throw Him

Wow.

Even in our fast times of digital media and words at the speed of thought, a good old newspaper headline can still get your attention. More on that in a minute. First a frame of reference...

Since I teach real estate investors and entrepreneurs how to raise capital from private individuals for their businesses, I often compare and contrast private money with using other (inferior) sources of financing. To the naked eye, it might appear as though I have something against banks, mortgage companies and other institutional lenders.

I do.

These guys are a big part of the reason why the national economy is hurting right now. But, mostly, if you rely on the philanthropy of these institutions for your business life blood you will probably find yourself in short supply. So, I feel it extremely necessary to "sound the alarm" - that even your local banker is not your friend.

Why?

Let me answer that with the headline from this morning’s (2/23/10) Wall Street journal:"Lending Falls at Epic Pace “Kind of eye catching, huh?

The article goes on to quote a guy from Ohio who is trying to get a loan for his home health care business. He was turned down in 2008 and he was turned down again recently - in spite of President Obama's new "small business lending initiative."

Watch Out

One popular thing in real estate investing, particularly commercial investing, is for lenders to require "up-front “fees before the loan is even done. Processing fee, application fee, escrows for appraisals and other 3rd party reports.

A nasty little secret among most of these lenders is that they make most of their money from these fees. The bad thing about this is that: a. the fees are non-refundable and b. many lenders will smile and nod and you and tell you they can do the loan and take the fees and then you get stuck in limbo for months, the loan never closes and your out the money.

This recently happened to some real estate investors I know. Definitely not pretty. So it goes when your working with clowns. The flower on the lapel always shoots water at you. A Strange 12 Month I have received at least 20 calls over the past year from people who were referred to me BY BANKERS. Yes, they called me because a local community bank or a larger regional or national bank had turned them down and the loan officer sent them to me. They thought that I could make the loan. Guess what?

I did.

What a great opportunity to get in on deals. And, what a crazy environment we operate in where my company can get in on awesome opportunities without really having to lift a finger to get the phone call. Amazing that these banks would pass up profitable loans. I wonder what they had to say to get the customer in the door. They got them in the door and then sent them over to me. These banks will kill for deposits but they won't make a loan at gunpoint. Of course, private money can cure many of these ills for you. The more capital you have, the more firepower you bring to the table and the more control over the transaction you can get.

If you're a real estate investor that is serious about building a substantial business or even cashing out a few properties a year, matching a private investor with your deals will be the best move you can make. Better to not trust the banker as far as you can throw him.