Financing Contingencies Can Help Protect You in a Contract!

You should always consider making your offer contingent on financing, especially if you are getting a loan. Your lender says yes based on the information that you provide to him. However, sometimes, the information that you provide is based on what the seller told you. Sometimes these numbers are different when you see the actual tax returns.

The lenders want to see the current financials and they want to know what your plans are for the property. Based on those plans you will create a pro-forma. A pro-forma is a projection of what you believe that the property will make after your adjustments to the facility. You will need studies to back you up in order for the banks to be willing to work with you or they will just use the current numbers. You want your pro-forma to be realistic. You don’t want to convince yourself that a property is more profitable than it actually is. If you overestimate your occupancy levels or your rental rates, you may end up with a negative cash flow. That is definitely not why you are investing.

Another issue that you may run into in our current market is the volatile interest rates. You may think that you have a rate that will allow you to cash flow only to discover that your interest rate has gone up significantly. Small changes in the interest rate will make a large difference in the amount you are paying each month. This may negate your cash flow or even turn it upside down. You need to have a way to back out without a lawsuit if things change on you.

The lender will probably do an appraisal of the property. As part of that appraisal, they will evaluate the rents. They want to make sure that your numbers are realistic. These also take a significant amount of time. Make sure that you are giving yourself enough time to get your reports back before you schedule your closing date.

The last thing to keep in mind is that your investors may change their minds. While you are doing your due diligence, they may find a property that is ready today. This could deplete their funds and make it so that you don’t have as much cash to invest as you thought you did. If you have a financing contingency, this will be frustrating, but not damaging because you will be able to get out of the contract.

You don’t want to put in so many contingencies that your seller is afraid to accept your offer. However, you need to put in enough contingencies that you are protected. Make sure that you find a balance that works for you. In some cases, you will be able to keep your earnest money from becoming non-refundable until after your inspections and financing are in place. When that happens, making offers costs you nothing if you back out. Don’t be afraid of making offers, just make sure that you are protecting yourself and your earnest money in case things don’t add up. As always, happy investing.