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‘Barber shop talk’ is always interesting to listen in on. You have a lot of people espousing how much they know about a particular topic, but in the end, a lot of it is just plain bad information. For instance, there are some people who have absolutely had their heads in the sand regarding the new requirements to obtain financing for real estate. Some of them think that a high credit score and a “good job” are sufficient to get one to the finish line……with 100% financing!! Sad to say they are dead wrong.

Nowadays, there is no 100% financing. To be quite honest, except for some rare cases, there is barely any 90% financing available, except for the creme de la creme. As the title of this article suggests, cash is definitely king, as the ones most likely to get deals done, are those who can show cash balances that are 20-30% of the total value of a property (in the case of a refinance) or 20-30% the total amount needed to make a purchase (in the case of an acquisition). However, the paper trail requirements of this cash can be very tricky.

Gone are the days where you could bring in funds on the last day and no one would question it. It is common place, in fact, I have come to expect, that the lending institution providing the financing will track the funds back to the actual account used to verify that the owner of the funds is the same name on the loan application and/or personal financial statement of the borrowing entity/individual in question. Another potential landmine is not using the same account for the down payment of final funds that was used for qualifying and underwriting. You can have your deal go up in smoke and be outright canceled due to a last-minute bank account switch. Case in point, I was one day away from funding a deal for a client and he had a wire sent in to close escrow from an account that was not disclosed on the loan application. The funder of my transaction completely refused to fund my client’s loan because the account number for the wire didn’t match the account number used for qualification purposes. Mounds of paper had to dug up to show that the account numbers were switched over during a post-merger integration of accounts between two banks. The client was livid, and the lender just shrugged its shoulders absolving that it was the client’s fault. Even though my client was putting 25% down to close the deal, the lender did not care. They wanted their paper trail or no funds.

So lesson learned……..in the new day and age of increased regulation and documentation, be consistent with your accounts used for qualification and for final fundings. The headaches just aren’t worth it.

To my dismay, I have seen many people who would have been “slam dunks” for financing in 2006 get completely shut out of the capital markets in 2010. Whether commercial or residential, the factors which determine who gets money from commercial banks (or any institution for that matter) is pretty consistent for all property types. Lately the characteristics of those who have been successful in obtaining financing have been the following:

• 720+ FICO score
• verifiable and sustainable employment or self employment for the last two years
• 12+ months of mortgage payments in an immediately liquid account
• a minimum of 25% in reserves if planning on purchasing an investment property
• two years experience as a landlord/property manager, if purchasing an investment property
• no late payments or foreclosures on real estate debts

These are the basic requirements as you can see, however, right now, that ‘s what the lending world wants. Knowing these factors can help to make or break your deal. Study them and learn them, as they are the fundamental essentials which are involved in each and every deal in our current marketplace for money. If you don’t meet the requirements for the various line items, bring others in. Getting financing nowadays  is tough, but it doesn’t need to be impossible if prepare appropriately.

I have been in the world of Real Estate Finance for over 14 years now, and I can definitely say that I have never experienced anything like what I am seeing in the capital markets right now. Whether it’s a good friend buying their first little two bedroom starter home or a client of substantial net worth trying to refinance their apartment community in another state, it is very difficult, if not nearly impossible to obtain traditional capital for your real estate needs these days. Although there has been a slight thawing of the capital markets, only the “crème de la crème” are getting financing these days. So what can one do if they want to get some form of financing to make that dream acquisition a reality?? I have a few suggestions that I will briefly share with you.

1. Ask for seller financing AKA “carry back.” I know of many investors, large and small, who got their start in real estate by asking their seller to “carry back” all or a portion of the purchase price of their subject property. This can apply to any piece of property that is out there (single family residence, multi-family units, office building, raw land, etc.). Depending on the motivation of your seller, and/or the kindness of their heart (literally), they may take a leap of faith and become your bank. If they do, this will avoid the long drawn out process of getting a loan approved through a conventional which can take anywhere from 60 – 150 days in the current environment (and you still may not get approved!!).
2. Get a co-signer. This may make for interesting bed fellows, but many times you may know someone who has substantial net worth who wants to see you succeed and is not fearful of linking their financial creditability with yours. If so, this could be a way to avoid missing out on a great opportunity, particularly if your financial profile is weak and/or you don’t have the track record that a bank is looking for. The caution with this option is that your destiny is tied to your partner, and the only way that you will be able to separate yourself from them is if you go through the process of demonstrating your ability to financially stand on your own two feet or find a new partner to partner with. Moreover, your partner will most likely want to be cashed out at “market value,” meaning that if there has been some appreciation in your asset, they will want their share of the current value, and not the value at the point of purchase.
3. Form a real estate syndicate.  Many people choose to forego buying properties on their own and instead choose to incorporate as some form of buying group. Whether it be a limited partnership, REIT (real estate investment trust), or LLC, the advantages to buying in a group can be numerous. Limited partners receive their portion of the profits while assuming none of the direct liability. As the entity establishes a track record (usually two years of profitability), its financials will allow it qualify on its own operational merits. Many times syndicates purchase their properties “all cash,” completely side stepping the loan approval process completely. The main disadvantages are that someone usually assumes liability as the general partner, and may have to sign a personal guarantee for the first two to five years. Additionally, the procedures for removing oneself from a syndicate can be legally challenging requiring multiple appraisals and agreements to determine the value of the portfolio and how the remaining partners will payoff of the departing member.
4. Go “hard money.” For those of you who are not accustomed to this term, this is money that is normally borrowed from entities that promise cash for your real estate needs with very few documentation requirements. Normally the entities that provide this type of financing have pooled together a group of high net worth individuals and have allocated funds to make loans to those in need of “fast cash.” Whereas a conventional bank may take (as previously mentioned) 60 – 150 days to approve you for a loan (depending on type of property and complexity of the deal) a hard money transaction can be closed in literally days, as the decision maker may be just one individual who just needs to see the property and run a desktop analysis of the value of comparable properties in the area and confirm that there are no issues with ownership (title) of the property. Although you will receive the cash fairly quickly, the interest rates are usually double digit and you normally won’t get more than 70% of the money that you need. Accordingly, you will have to bring some money to the table, as the hard money lender will want you to “have skin in the game.”

These are just a few of the ways that one can get deals done when traditional financing is not available or an option. I will have more interesting factoids and comments to come on how to navigate the world of real estate finance.  In the meantime, if you have comments or questions, please post a comment or reply.