I want to designate your birthday as a day to bring joy and to celebrate the “NO’s” that come out of the mouths of every lender, including mortgage brokers, bankers, and others who engage in securitization to pool loans and sell them off to sources such as Fanny May, Freddy Mac, or other secondary markets sources.
The “NO” occurs when a prospective borrower or borrower’s representative calls to discuss a loan scenario, knowing that the borrower has very little or no money in the proposed transaction. In the industry, this is referred to as “No Skin in The Game.” After attending some fix and flip seminar, and paying fees of $1,500 or more for a couple of days of hype, borrowers develop a new awareness and confidence, and even arrogance about how it is the right decision for the lender to make this loan. If the lender refuses and says “NO”, the prospective borrower will suggest that the decision is out of ignorance, or lack of experience. After all, it is a great deal!!
Thousands of hours, across the country, are wasted on this exercise; productive hours spent by loan representatives who are continuously being solicited by opportunist wealth dreamers, who have no money.
It is so easy, just borrow 100% of all the capital to purchase a property, borrow all the fix-up costs, and borrow all the on-going operating costs. If all goes according to their proforma, the prospective borrower will become a capitalist genius. If anything goes wrong, like misjudgment of the budget, hiring bad contractors and subcontractors, failure to lease up to pro-forma, or collapse of the market, the borrower may walk away, free of any responsibility. With the borrower’s newly discovered knowledge and wisdom, he/she can assume the position of financial genius either way.
The story goes like this, “ring, ring, ring”, shortly after the usual introductory courtesies, you get down to the standard questions according to customary real estate lending practices. The client will sway, dodge, and subvert, just like some experienced borrower(s).
I want to borrow $300,000. Great, what is the collateral? It is a two million dollar- property. Great, will this be a first or second loan? It will be a second. Well then, how much is the first loan? It is one million dollars. So, does that mean a total of 1.3 million total loan encumbrance, including the first loan of 1 million, and the second loan of $300,000 on a 2 million-dollar property? That sounds like a 65% combined loan to value. Yah! it does. That is what I’m looking for. Great, how long have you owned the property? Well I don’t own it yet. Is it in escrow to purchase? How much are you paying for it? 1 million dollars. The seller, likes me, so he is giving me a really, really, good deal, and carrying all the paper. I don’t need to come up with any money. It’s all there. And, then you loan me the $300,000 second, I’ll be in fat city.
According to the borrower, there is plenty of protective equity. When he/she finishes fixing it up, and gets it rented up, he/she can refinance it with an institutional lender, and pay you off, or he/she can sell it at a fat profit.
You see, Mr./Ms. lender, I am a financial wizard and a genius. I learned in a seminar how use financial leverage, and flip all the risk to you. If I win, I will make a ton of money, and if I lose, it is your loss, Mr./Ms. lender. Aren’t I smart?
If I told you that I have heard this story more than ten thousand times, it would be an understatement.
The whole purpose of this special week, is for intelligent and experienced lenders to celebrate the thousands of “No’s” after being subjected to discussions and loan requests from prospective borrowers who have zero-net worth and/or zero capital invested.
If a borrower were successful in having a lender make a loan wherein the borrower has no economic exposure, then the lender is in a position of providing “risk capital”, and becoming a de facto joint venture partner. “Risk Capital” consists of investment funds allocated to speculative activity, both high-risk, and high-reward.
I bet that each one of you has dozens of stories, just like this.
Dan Harkey
Business and Private Money Finance Consultant
Bus. 949 521 7115
Cell 949 533 8315
dan@danharkey.com
This article is intended for educational purposes only and is not a solicitation.
