Profiting From Real Estate Investments An Investor Newsletter From HomeVestors Of America, Inc. By Marcie Geffner / Vol. 1 No. 3 02/15/2006 Tips for Small-Balance Loan Borrowers Many national, regional and local financial institutions are eager to fund small-balance real estate loans, usually defined as $5 million or less. These loans may not be as profitable for the lender as larger loans are, but borrowers who start small often come back for more and bigger bites at the apple as the years go by. Obtaining a small-balance loan to purchase investment property isn’t an easy or intuitive process, yet it needn’t be intimidating or excessively burdensome or complicated. A competent loan representative who specializes in small-balance loan products should take care to guide the novice gently from the start to the finish. Borrowing millions of dollars is never a stress- free situation, yet it can be made easier with clear communication between the lender and the borrower, full disclosure of the borrower’s merits and demerits, and realistic projections about the income and operating expenses associated with the property. Here are some tips: Begin with a list of experienced lenders who operate nationally or have a presence where the property is located. Obtain referrals from other property owners, property investors’ groups, or accountants and attorneys who are involved in real property investment transactions. Shop around and make sure you feel comfortable not only with the lending institution and its loan products, but also with the individual who will be helping you. If you don’t feel comfortable with the loan representative from the outset, you’re not likely to become more comfortable with him or her when a stressful problem arises. Be prepared to answer questions about why you want the loan, the liquid funds you have available for closing costs, your credit history, your willingness to accept a prepayment penalty, your tolerance for paperwork, upgrades and maintenance that you know the property needs and your anticipated exit strategy from the investment. Provide realistic financial projections for the property’s revenue, expenses and cash flow. Remember that property taxes will be reassessed when the property changes ownership. Be cautious about projecting substantial rent increases that could prompt the current tenants to move out. And, if you hope to amass a large portfolio of rental properties, don’t propose an operating budget that doesn’t provide for a property manager. Sooner or later, you will want to hire someone to help you, at least part-time. Ask the lender to provide cost estimates for third-party reports, taxes, insurance and other prepaid costs that will be due at closing. Obtain the third-party reports as soon as possible to avoid surprises that could delay the loan process. Disclose any known health or safety issues on the property to the lender as these conditions will be discovered and likely will need to be mended before the loan closes. Consult an attorney about the terms of your loan if the amount is more than $4 million or possibly even around $3 million. A little extra advice up front can prevent a lot of headaches later. Never hesitate to ask a question. It’s better to feel slightly discomforted at the thought of your own ignorance than to find out later that you didn’t understand the terms and conditions of your loan. The lender should be willing and able to answer your questions. Be prepared to provide additional documentation in a timely manner. Incomplete loan files drop to the bottom of the lender’s work pile and can remain stuck there as newer opportunities take priority. Don’t balk if the lender requests documents that seem personal in nature. Tax returns, for instance, are usually required. Copyright 2006. Marcie Geffner. All rights reserved. COMING NEXT ISSUE: How to hunt for housing market data. A look at how to obtain reliable hard data about neighborhoods to make a smart decision about where you want to buy, sell and own property. The Investor e-Newsletter is provided free by HomeVestors of America, Inc. HomeVestors of America HomeVestors franchisees may borrow up to $1.5 million in short term loans from HomeVestors of America to purchase property for resale. HVA advances repair funds to assist franchisees in the renovation process. If you have a question, comment, or an idea for our newsletter, please click here. <back | printable version