Banks Ripoffs: Eliminate Them with These 12 Questions

So… it’s time to bank finance, huh?

I have an MBA and I didn’t go to banks until I absolutely had to. My thought was, although I understand leverage, I wanted to show proof of concept before I approached anyone for money. So… after got my feet wet and self-financed 5 houses, I knew I needed to start financing if I wanted to grow.

Putting an offer in for cash by showing POF (Proof of Funds) is very appealing for sellers. If I do it with no contingencies, I can usually get it under contract. (I own a construction company so my guys check it out before I put in an offer or sign a contract.) So… I got a credit line on my houses. The way that works is it’s a moving target -WSJP + a certain %. (Wall Street Journal Prime which is published daily) However, it was just for a year, which gave me enough time to refinance out into fixed 5-year mortgages.

So for all new houses, I would buy for cash with the money from my credit line and I found a great local community banker that would refinance me out. (75% of appraised value if it is a brick home or 65% of value if it is a frame home. I opted for slightly higher interest rates for 5 year fixed (or arms) that is amortized for 15 years.) This means that the amount I need to pay every month would pay off the note in 15 years. I did this so that my monthly payment is very low. However, there is no prepayment penalty (very important!) so I can pay over that amount if I’d like. He also does 80% of the cost of repairs. Great!

I found a Title company that understands wholesaling and investors. We worked it out that I close with them (and get my discounts) and then they keep the title work open for 10 days. My banker comes in after me and refinances me out. Beautiful system! However, for this ease of use, the interest rate was slightly higher. (6.15% vs. 5.9%). All good! I’m rocking and rolling along!

I started another investment company with a partner (it was basically a holding company for some of our wholesaling deals that were too good to pass up - like 2 and 3% deals!.) When we put a few houses under contract all at once, my banker raised the interest rate to 6.75%! And this was without telling me. My partner (who billed himself as a “finance guy”) absolutely flipped out. "Why is the interest rate so high?? We can’t use him. Let’s go to this other banker I met (I should mention this guy just moved into the area and had no experience with local bankers and knew no one.) We’ll call this guy Banker 2."

Fine. But that’s when I got my banking education.

I had lunch with my accountant and we worked through numbers and scenarios. I asked her to put some calculators together for me so I could manipulate the interest rates. I also asked her to add a column so I could see how much I would save if I paid the mortgage 2x per month instead of just 1x. My goal for my properties to have them all paid off in 5 years… so I needed to know how much I would need to pay over and above the minimum amount. See my “expensive” money from Bank 1 wasn’t all that expensive after all.

So after some number crunching, the difference between the two interest rates over the course of the loan (5 years) was about $1,300. Not that much money. But wait, Bank 1 does his own appraisals which Bank 2 told me would cost $400-500. So we’re at $800. Because it only takes 2 weeks to get the process done vs. 4 or more weeks with very subjective appraisals (there are 4 appraisers they can pick from and 2 of the appraisers always give low numbers. For example, I’m a real estate broker so I have access to the MLS. When I looked at the comps that were done, they were several comps for houses bought at sheriff sales, tax sales, REOs, and some of the photos had the windows boarded up compared to may houses that are in great condition and could be sold retail any time I want! Very different products which would bring very different values.)

Also, keep in mind because it can get refinanced so quickly, I can get the rehabs done faster, which mean they get on the market faster. For Bank 1, I literally stop by with invoices or via email, and the amount is deposited in my checking account at the bank. The Bank 2 takes several days to get back to me and a few more days and paperwork to fill out to get paid back. So... my “expensive” money from Bank 1 wasn’t all that expensive after all!

So my solution was to go back to Bank 1, and tell him I loved working with him but he can’t raise my rate without formal notice. He agreed so I’ll work with him (and continue to watch him like a hawk.)

I have also developed other relationships with bankers so I won’t get caught off guard again.

Once I got the system back running again, I went to Bank 3 that gave me a lower rate (5.75%), no prepayment penalty, appraisals that take 1 week for existing properties and a credit line for new acquisitions.

Bottom line, always network with investors and bankers. Understand what you are getting so that you can compare apples to apples. And ask questions before you decide to go forward with a banker.

General:

1. Get recommendations from other local investors.
2. What is your methodology? Are you doing appraised value or actual cost plus repairs?
3. Do you have a prepayment penalty?
4. What are all of the different possible loan products that are offered?
5. What are the fees associated with each loan?
6. How are the appraisals handled? Are they done in-house or externally? What is the process if I don’t agree with them?
7. If I’m doing initial financing, (and I’m doing the BRRR strategy - you need to explain this process… they will not know what it is) how long would it take for the repairs to be reimbursed?

After you are comfortable with the general answers...ask these:

1. After I get all of my financial information to you and I am approved, can you walk me through the process from property identification to funding? What is the timeline?
2. Can you send a term sheet?
3. What is your interest rate? What is it based off of?
4. I close at X title company. They will keep the title work open for 10 days. Is that enough time for you to refinance me out?
5. How do we get started? What is the approval process like? Tell me about the loan committee process. (sometimes they meet 1x per week or every other week, sometimes it’s 2 people on the committee, sometimes it’s huge) Good to know what you are dealing with! Less bureaucracy is usually a lot easier to deal with!

Tips:

1. Be organized. Before you contact bankers, get all of your information together - Tax returns, pay stubs, personal financial statement, bank statements, credit card balances, etc. Put together a bio so you will be able to communicate what you’re about succinctly.
2. Get your accountant involved. Have her get all of your financial reports together and go through them together. Let your accountant know that you will be working with a banker and you will do an introduction.
3. Look at the big picture. Take all of the fees, terms and ease of use together as a whole in order to make the best decision for your business.

What questions am I missing? What’s your experience been? How do YOU win the banking game?