Even in normal times, building a great relationship with a lending partner is a difficult challenge for property investors. But these are not normal times.
The outbreak of COVID-19 has shaken up every industry, including real estate. Though the long-term impacts on housing finance remain to be seen, a potential economic downturn would present both obstacles and opportunities for flippers and investors. Now more than ever is the time to reassess your lending situation. Here are six questions to ask your lender today, to ensure you have the right partner moving forward into an uncertain future.
1. Where does your money come from?
In today’s chaotic environment, understanding the financial solvency of your lender is paramount. Ask them how they’re capitalized and who is ultimately funding your project. Is your lender providing funding from his or her own managed fund? Or do they have big backers? Wherever the funding comes from, try to figure out how deep their pockets are. If possible, get an exact dollar amount of your lender’s assets under management. This will give you clarity on how reliable the funding source is, and how resistant it will be to broader economic volatility.
2. How has the current economy changed your lending terms and are they flexible?
When borrowing money from a lender, you need to be laser focused on their loan terms. Remember, the lender wants to ensure the financials make sense. In a downturn, this is even more important than usual. So it’s likely they’ve tightened up their terms to avoid making overly-risky loans in an unpredictable business environment. Ask what has changed, and how flexible the lender is to make exceptions. Focus on interest rates, loan fees, loan-to-value ratios, and timelines. Make sure you understand exactly what the lender expects from you, and how much out-of-pocket cash you’ll need. Both sides need to make the numbers work, so be sure to ask upfront what terms are negotiable.
3. Have you added any additional fees or charges?
Again, in uncertain times, everyone feels a little more cautious about making a bad deal. In many cases, your lender may increase their setup and origination fees to mitigate their own downside risk. Perhaps they’ll reduce their loan-to-value tolerance, meaning they’ll expect more cash from you upfront. Of course, some lenders may go in the opposite direction. If business slows, they may need to entice more potential borrowers to request new financing. It’s possible your lender may offer even more favorable financing terms. Understand what you’ll need to pay and how it’s different from the way your lender normally operates.
4. Have your timelines changed?
You always want to know how fast your lender can process a loan. Time is money, and the faster a deal closes, the sooner your investment will start working for you. But in a crazy economic situation, like a global pandemic, timelines may be thrown way out of whack. Typically, larger lending firms and banks may be better capitalized, but they often take longer. Smaller players may turn deals around more quickly. You’ll have to way the risks and rewards of speed vs. access to capital and decide what’s most important for you. Ask if your lender pre approves loans, as this may expedite the timeline a bit.
5. Do you provide financing for renovations?
This is an obvious question for any flipper in any sort of economic environment. But it’s even more critical now, as an economic recession could lead to more foreclosures and distressed properties coming onto the market. If you’re seeking financing for a property requiring extensive renovations, you need money not just for the property but also to fund the rehab. Make sure you understand any differences in terms between the asset and the rehab costs. If your lender won’t provide the additional renovation financing, you’ll have to decide whether to find additional resources or use a different lender. It’s also a potential red flag if your lender is not experienced in loaning money to fix and flip investors.
6. Do you have any property investor clients in your portfolio similar to my profile?
Lending to property investors is unique and not the same as lending to owner occupants or other retail homebuyers. You need to seek out relevant expertise. This means digging more deeply. Consider whether your lender has clients in your local area focused on similar fix and flips, and how much money they’ve loaned. What percentage of their time and money is spent on property investors like you? Do your research and look at online reviews to double check the truth in their answers. In a difficult operating environment, trust and credibility are everything.