10 Basic Mistakes Borrowers Make and How to Avoid Them
By: J.R. Foster, Robert Louis Capital
Winter 2018 2019
Don’t get tripped up on the path to securing a commercial real estate loan.
EVEN THE MOST experienced commercial real estate professionals have made mistakes when trying to obtain a loan. Here are 10 common blunders, plus advice for avoiding them:
1. Accepting the First Offer. Too many borrowers put all their eggs in one basket by focusing on one lender. The old adage “when banks compete, you win” should be every borrower’s mantra when seeking a commercial loan. A prudent borrower will work every angle to create the most competitive lending environment possible.
2. Focusing Only On the Interest Rate. The interest rate is obviously a crucial part of any loan, but focusing only on the lowest rate and nothing else makes the borrower lose sight of the bigger picture. For example, the difference between a 4 percent rate on a 20-year amortization versus a 5.25 percent rate on a 25-year amortization for a $5 million loan is only about $330 per month in favor of the 5.25-percent rate. In this case, amortization plays an important role in the amount of the monthly payment. Be mindful of all aspects of the loan structure, as borrowers often end up with a loan that is not the best fit for their goals.
3. Not Disclosing Credit Issues. It is imperative to come clean about all credit issues upfront. A borrower who doesn’t disclose everything creates headaches that can lead to the denial of a loan. The key is communication, which helps the borrower look favorable to lenders and helps the banker craft a positive narrative that makes underwriters feel comfortable. Many loans have been completed despite significant issues with the borrower such as bankruptcies or criminal convictions.
4. Failing to Build Banking Relationships Early. Banking is a relationship business. The earlier borrowers meet lenders to understand how much credit is available to them, make personal connections and tell their story, the easier the process will be. Bankers are more comfortable when they can get to know borrowers before submitting a loan request, and personal rapport can help generate support in loan committee meetings.
5. A Lack of Liquidity. Banks are interested in collateral, security and managing risks. One way borrowers can hedge against risk is to ensure they have more than enough liquidity to make the bank feel comfortable about their financial strength and position. Understand what banks want to see on financial statements, because borrowers may need to bring on additional partners or increase their equity contribution to meet loan covenants.
6. Allowing Too Little Time for Closing. A common mistake borrowers make is not allowing enough time to close the loan. On purchases, borrowers should work with their brokers so the contract has time for inspections and contingencies. They should also allow at least 60 days for closing. It is better to close early than end up needing more time to complete the transaction.
7. Being Unprepared and Unresponsive. Borrowers should have their financial documentation in order long before they apply for a loan — or even before they put a property under contract. A borrower who approaches a lender with a complete loan package in a timely manner builds confidence early in the process.
8. Not Hiring a Proven Mortgage Broker. A reputable mortgage broker who focuses solely on commercial loans can be a good friend. Find one with a vast network of lending relationships, knowledge of the local capital market and a proven track record of closing loans. The right mortgage professional(s) will save borrowers time, money and stress.
9. Failing to Do Homework. Not all lenders are created equal. By doing thorough research into the local market, borrowers can quickly determine which banks are serious about lending. Nothing is worse than working with a bank that has no real intention of funding a loan. In addition to building lender relationships early on, get recommendations from trusted real estate agents, title companies, lawyers and others.
10. Stressing Out. Securing a loan is not an easy or quick process. The truth is that in some cases borrowers will experience rejection before they find the right bank that is comfortable with their loan request. So relax and let the process play out.
J.R. Foster is managing partner and president at Robert Louis Capital in Cincinnati.