The bank turned me down! Now what? - Posted by Jim Beavens
Posted by Jim Beavens on October 15, 1998 at 13:59:17:
Ok, this may be pretty long because there’s a lot to bring folks up to speed on my situation, so please bear with me. I probably should have come to my “partners” here sooner, but there isn’t a whole lot of creative financing going on here, and so far I have trusted the professionals I have worked with. But now things aren’t going so good.
I currently have two properties under contract. They are both 6-unit apartment buildings that are on the same city block, with a sales price of $90,000 each. This price of $15,000/unit is right around the market price for the area. I am buying these properties to buy and hold; the gross rents of $2,400/building and the cap rate of 15+% will provide good cash flow, and I expect this area to improve quite a bit in the next year or two (the city has shown a commitment to invest in urban renewal, and there is commercial development literally blocks away from the area).
I had about $17,000 in cash to invest, which came from a $10,000 home equity loan, and $7,000 from borrowing half of my 401(k) account at work (no, I’m not looking to replace my job, just trying to turbocharge the return on my savings ;). One of the reasons I wanted to buy these properties is because the loans were assumable (after being qualified by the bank, of course), so I wouldn’t necessarily need a full 20% down payment, and therefore I could buy both of them. =) Or so I was told…
After my broker wrote up my initial offer of $80,000 with $7,500 down for each building and presented it to the seller (the broker is also the listing agent in this case), the seller called up his bank to see if this would work and if I could get both buildings with the amount of cash I had. They said that if they could get the pro-rated rents and deposits of about $3,000/building, then I had enough down payment to assume the loan. The seller thought that getting 12 units for $15,000 cash out of my pocket was a pretty good deal for me, so he checked with the bank and counteroffered with the full price of $90,000. Since the low cash down was most important to me, and the numbers still came out good with the higher sales price, I agreed and got them both under contract for $90,000
Now, I never did really get good information about the current loan, which was probably my first mistake. My broker was kind of reluctant to give that information to me, because I was still trying to figure out what kind of offer I wanted to make at the time, and he wanted to be sure he wasn’t leading me to make a lower offer and jeapordize his fiduciary responsbility to the seller. What I do know is that the seller has one commercial loan that covers three properties; these two plus one more that is a similar 6-unit but is located about 12 blocks away, and is also for sale at $90,000. At one point I did hear him mention the number $220,000 for the loan amount, but he quickly followed that he’d have to check at his office for the exact loan info.
I never really pressed this point, because I was assured that I could get both buildings with my cash, which is all I really cared about. I was told that this loan would probably be restructured with the seller, and then I would assume the two new loans that were created for each building. Or something like that. When I would ask my broker for details, he’d say that first I would need to be approved by the bank, then all of the loan details would be worked out. So I waited for the approval.
All of this transpired in mid-August, with a closing date scheduled for October 5th. As we neared this date, I still hadn’t received approval from the bank. I had been told 3 times it was going to committee for approval, but each time the loan officer said they ran out of time. The seller even started pressuring them to get it done, since he owns several businesses in the area that are financed by this bank, and supposedly has a lot of pull with them. He continually expressed confidence it would get done, as did my broker. In what turned out be a jump of the gun, I went ahead and paid $850 for an inspection of both buildings as part of my due diligence (which turned out very well for such old buildings, but I’m now out $850 on these properties. I know…dumb). We went ahead and signed an addendum extending the closing date to November 6th (now a little over 3 weeks away).
To make a long story short (I know, WAY too late), I heard from the bank yesterday and my application has been denied.
Making this even more frustrating is the fact that the loan officer I’ve been working with is on vacation this week, so I was informed of this by someone who wasn’t familiar with the details. He said I was denied because of “liquidity issues”, whatever that is. When I asked him to explain, he said something like, “there’s concern about having enough cash when the loan is due”, or something to that effect. When I pressed further, he said I’d have to call back next week to get a detailed explanation from my loan officer. So frankly I’m clueless at this point as to what happened. Part of me wonders if it made any difference that this went to committee without the loan officer there, who could at least say that she has met me, shook my hand, that I appear to be an upstanding citizen, etc etc. Maybe I’m just grasping at straws now.
Anyway, I informed my broker, and he says it’s not over yet, because the seller is going to try and find out what happened and see if he can’t get something worked out. I asked my broker if we should start looking at other financing options, at which point he said anything else would be difficult with my small amount of cash. He told me to wait until next week to see if we need to go to plan B, and in the meantime he’ll try and figure out what plan B is. Frankly I’m tired of leaving all of this in other peoples’ hands, and I’m beginning to think I need to step up and take control.
Which is why I’m here.
First of all, I’m wondering if anybody can translate the “bankerspeak” of the guy that called me, and explain what their problem is. After thinking about this for a while, I’m starting to think this was a fancy way of saying that the LTV is too high, and if they had to foreclose they don’t think they could get all their money back from a sale (despite what they said about me having enough cash, grrr). This is actually something I was worried about, and was kind of surprised that they would restructure their $220,000 loan so that $160,000 was put on two properties valued at a total of $180,000. I’m not that surprised that they would take another look at this and ask themselves what they gain by doing this, especially when the higher-leveraged properties are being bought by an unknown entity (ie, me ;). I don’t know, any other interpretations out there of what they meant?
Secondly, does anyone have any ideas about how else to structure this deal? The seller says he’s motivated, but he’s not willing to carry any of the financing (so much for motivation). He’s a tired landlord who owns a golf course and would prefer to spend more time there than driving 40 minutes into downtown every weekend to do maintenance on his buildings. He’s actually OVERmaintained these buidings, and they’re in much better shape than most other buildings in the area. That’s another reason I like them, because they’re turnkey and fully rented.
It seems to me that one way or another, because I’m buying these at market price, I’m going to have to find somebody to carry a second mortgage if this thing is gonna fly. And I’m not even sure how this would all work out since one loan is covering three properties. I might need to buy all three! =) (which wouldn’t be a bad thing, and would even increase my cash flow, it just means I have LESS cash as a percentage of the purchase price).
Excuse me while I think out loud for a moment, but the only thing I can really think of is to create a second mortgage and immediately sell it for a discount. The seller would get less money this way, but perhaps if I offered to take all three properties off his hands (which I know he would prefer), then he might be accomodating to this. Plus I could try again to assume the loan, but not mess with restructuring or anything else that would give the bank a chance to screw up this deal again. If the current loan was for $220,000, then I could buy all three for $270,000, pay $15,000 down, have the seller hold a second for $35,000, which would immediately be sold at a 70% discount for $24,500, leaving him with $39,500 in cash (an effective sales price to him of $259,500, which isn’t much of a discount on a $270,000 transaction). Hmmm…I kind of like this idea. Plus I could educate the seller that by holding the note for 3 or 6 months and letting it get some seasoning, he could get an 80% or 90% discount for a few extra thousand (couldn’t he?). Any tips on how to best structure a second mortgage in this situation that would make it attractive to a note buyer? In this case, the note buyer would have about $50,000 in equity, which is about 18.5% of the property value. Would a 70% discount be realistic here? I’ve never sold a note before, any tips on how to find a buyer?
I guess my third question would be how I could better deal with banks. I’ve only worked with mortgage brokers in the past when buying my home, and am unfamiliar with the commercial loan process. Once the application has gone to committee and been turned down, is it over? Is there any chance now for reevaluation if we find out there’s something they don’t like that I might be able to fix? I’m just wondering how much effort I should put into this bank, or if I should just move on (I have an excellent credit history but a high debt/income ratio because of my loans to obtain my cash, while my wife’s credit isn’t too good with some significant credit card debt and a few late payments. They said they wouldn’t look at my wife’s credit, but I’m not sure I believe them). Another great thing about assuming this loan is that it won’t cost me anything in loan fees (at least I don’t think).
My final option is to only buy one of the properties and put 20% down, but I fall short of my goal of acheiving 40-50% cash-on-cash return; 6 units for $15,000 would only give about a 25% return. If it comes down to only being able to buy one, then I’m going to start looking for other properties first that might have a more motivated seller. But I’m not quite ready to give up on these yet, considering I have them under contract for the next 3 weeks and I’ve already put some money into them.
Anyway, thank you for reading this far, and I appreciate any response. At the very least, this has given me a good chance to sit down and really think about how to solve my problem. I think I’m going to fax my broker with some of the financing suggestions I mentioned here, and see what they think. So thanks for your help so far! (grin ;).
P.S. These properties are located in Kansas City, Missouri, however I live out of state. So that presents another potential problem in this whole thing, in that I can’t take as much of a hands-on approach as I otherwise might (to see how I came to purchase property out of state, see www.terratour.com; not a plug, just an explanation).