Learn from the tips in these continuing articles.
From reading my previous articles, you realize that there is a lot of information that entrepreneurs need to acquire before approaching their banker. The prior articles had trips and traps noted, but some require more explanation, so we’ve added them here in this article. These are necessarily more or less important, just presented with more information. But even with all the information you’ve been given, there are a few more things you should be aware of before you walk into the bank.
There are certain things your banker isn’t going to tell you. Learning these tips and traps can save you time, money and headaches down the road. Most of the information in this article comes from Ron, from an entrepreneur’s perspective, though Greg has certainly got plenty of lessons to teach about getting everything to look its best and to get good results for all parties.
Tip No. 1 – Appraisals Aren’t Always Needed
Although appraisals are very common on real estate deals, you may not need one if the property’s value is below a certain dollar amount. The threshold varies by bank.
Banks can use tax district appraisals, depending on the loan-to-value ratio, rather than conducting a new appraisal. In the current economic environment, the Fed is concerned that local tax districts can’t keep pace with rapidly changing property values, because tax districts look at property on only an annual basis. But if the district says a piece of property is worth $200,000, a customer could likely expect to borrow $100,000 on that property — or 50 percent of the estimated value — without a formal appraisal.
Tip No. 2 – All Appraisals Are Not Created Equal
In commercial real estate, there are two kinds of appraisals: Full scope and limited scope. In a full-scope appraisal, the property is inspected thoroughly, while a limited scope requires less information. Typically, a limited-scope appraisal is all you’ll need.
Three factors are considered when a property is appraised:
- Cost: What’s the cost to rebuild this building?
- Income: How much revenue can you generate by renting this space?
- Comparable sales: What would be the price if you wanted to sell this property?
Keep in mind that customers can’t choose their appraisers. Regulations require bankers hire the appraiser. In the interest of fairness, you can ask your bank to put the appraisal out to bid. The rules have changed dramatically in recent years, so you can’t put it out to bid yourself. The new federal guidelines require the lender to get the appraisal and because of the more cautious approach, the odds are very good that the appraised value will be much less than you expected.
There are times that a lender can ask for an updated appraisal with a limited scope or a “drive by” update or “desktop”, and any of these can save the customer money. Don’t be afraid to ask. Factors such as performance of the loan and/or customer, amount of loan and how old the existing appraisal is can guide these decisions by your officer.
Tip No. 3 – To the Points
Points — the additional, up-front fees paid instead of higher interest rates — used to be fairly negotiable in real estate loans. With money less readily available in today’s economic climate, that has changed. Today, one point is standard as an origination fee on a real estate loan.
A point is pure income for the bank. There are no costs associated with it, and if the bank wants, it can reduce the fee to half a point or zero. In most cases, it doesn’t. But you won’t know unless you ask, because chances are the bank isn’t going to offer.
The negotiation of points depends largely upon your repayment ability. If you’re going into the deal without any money, you’re going to have to pay a one percent fee or even more. However, if you have a great deal of money, the odds of getting the fee down to half a point (or zero) are much better.
Lenders can also charge fees on commercial lines of credit. They can charge a point on that line of credit or they might even charge an “unused fee”. An unused fee is similar to having a line of credit; it means you want to have money available to you as a loan, but since you aren’t using the money, the banker can charge a fee on it. Many lenders don’t charge a fee, but expect to pay a commitment fee or unused fee that could be one to three percent of the loan or the unused amount. The reasoning is that they have to “save” deposits and capital to offset your line of credit in case you decide to use the money, so they want to earn something for keeping that money available, and because they have processing costs related to putting your credit in place, even if you don’t use it.
Remember only you can make business great!
Ron Sturgeon, founder of Mr. Mission Possible, small business consulting, combines over 35 years of entrepreneurship with an extensive resume in consulting, speaking and business writing, with seven books published. A business owner since age 17, Ron sold his chain of salvage yards to Ford Motor Company in 1999, and his innovations in database-driven direct marketing have been profiled in Inc. Magazine. After the repurchase of Greenleaf Auto Recyclers from Ford and sale to Schnitzer Industries, Ron is now owner of the DFW Elite Auto suite of businesses and a successful real estate investor. Ron is a web expert, but he is also an expert in helping all types of small businesses become more successful and more profitable. Ron can be reached at 5940 Eden, Haltom City, TX 76117, 817-834-3625 or by email at rons@MrMissonPossible.com.