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Getting financing for your development or construction project can be challenging enough. But add to that any of the following circumstances, and it can be pure misery. If you’ve ever worked on a commercial construction project, you know how difficult it is to anticipate every scenario. There are several factors, as well as a large number of team members, both internal and external, who must all be “rowing in the same direction” with the end objective in mind. It truly takes a village to have a successful project that looks good, is appreciated by the community, and, of course, makes money for everyone involved. From planning to groundbreaking to vertical construction to sellout or lease up, it truly takes a village to have a successful project that looks good, is appreciated by the community, and, of course, makes money for everyone involved. Here are some unfortunate things we see happen in this business, and how to avoid them.
Your lender took a hefty deposit, and then didn’t close your construction financing loan.
Sadly, there are a number of lenders in the commercial bridge loan sector who are notorious for this. They charge some large loan commitment fee, or due diligence fee, or underwriting fee and then come up with some “reason” why they can’t close. Often they make it look like some shortcoming on your end, or some unforeseen market condition. “Oh, we didn’t realize you were going to use natural gas – sorry, we can’t fund your loan.” I’m being facetious, of course, but it really isn’t that far from the reality. I’ve gotten the call dozens of times from borrowers who told me that their lender did just such a thing. And sometimes those deposits have been significant, $40, $50, even $75,000 dollars.
These lenders do this over and over, and that adds up. So dozens of applicants don’t get their construction financing closed, but the “lender” accumulates millions of dollars in fees, and then turns around and closes one small loan with that money so that they can maintain some illusion of legitimacy.
What to do about it… Avoid lenders who require huge upfront deposits whenever possible. Nominal deposits or upfront fees may be reasonable in some cases, like to cover travel costs for underwriters, or purchase reports or data for due diligence. But I’m talking $10,000 or less. Anything more than that, and you’re gambling on a scam artist who probably has no intention of closing.
You’re dealing with a an unscrupulous broker.
Do you know what’s entailed in becoming a commercial loan broker in the majority of states in the U.S.? The answer? Saying you’re a loan broker. Yep, that’s it. You can wake up tomorrow, broke, uneducated, and unemployed and decide you want to be a commercial loan broker, and *poof*, you’re a loan broker. There is no state licensing agency. No association, organization, or accountability group. You just decide you want to be, and you are.
Now don’t get me wrong, there are some legitimate professionals in the field. But because the barriers to entry (or lack thereof) are so low, the business is also crowded with less than savory characters. Many of these folks will tell you they can help you, and even make a compelling case by throwing around favorable interest rates, or promising they can get some extraordinary deal which doesn’t exist. It sounds good, so they lock you into some agreement to represent you, and you’re on the hook for a fee, whether they perform or not. Or equally as bad, they just start blasting your loan request out to lenders. Effectively throwing sh*t against the wall to see what sticks. Even a blind squirrel finds a nut every now and then, and because the commissions in this business can be substantial, it only takes one lucky break a year for them to make good money.
What to do about it… Ask the person you’re speaking with if they’re a direct lender or a broker. If they’re a broker, be sure to discuss what added value they contribute to the process of getting you the development or construction financing you need. Some of them are great at what they do. The majority are not. Make sure you’re working with a good one, because they need to earn the fat fee they’re collecting from your deal. Or, when possible, deal directly with a lender or capital provider, and eliminate the need for added broker fees which come out of your pocket (even if they’re rolled into the loan).
You’re getting re-traded on your terms.
Sometimes this happens, and it can’t be avoided. Underwriting construction financing is an art, not a science, and so sometimes things come up which change the risk for the lender, and thus, change the terms of their offer. But you typically know when the cause is legit or not, so use your best judgment and communicate openly with your lender or underwriter. That said, sometimes it’s a strategy unethical lenders use to rope you in and “set the hook”.
I compare it to the old Realtor strategy for getting your listing when it’s time to sell your home. The agent who promises to sell for the highest price gets your business, even if they know they’re way over the market, and just plan on locking you into a six or twelve month contract, and beating you down with price reductions until your home sells. They add headaches, delays, and frustration, but hey, they beat out all those other agents who told you the truth about what your home was worth and should sell for. Yeah, that illustration may not apply quite as well in today’s nutty residential real estate market, but hopefully it gets the point across.
Lenders can promise you a low rate or origination fee, or higher leverage, or whatever else makes the deal seem feasible to you, and you want to select them as your capital partner. Unfortunately, sometimes they do this knowing they can lock you into underwriting, take 30, 60, even 90 days of your time, and then come back and re-trade your terms because of something they “discovered” in underwriting. Often I see them ask for additional cash at closing to make it work for them. Or, they justify their need for increasing your rate or fee due to that unknown risk they discovered. They know you won’t back out of the deal and start over again with some other lender, because they’ve already kept you on the hook for a meaningful period of time, and you don’t want to go take a chance on some other lender who *could* do the same thing, and cause you to lose even more time.
What to do about it… Make sure you’re communicating openly with your lender or underwriter. If you have a skeleton in the closet, just bring it forward. I like the colloquialism “throw the skunk on the table”. Meaning, just get it out there, so you can discuss it and move on. At least then you’ll know the terms they’re offering won’t be altered by that unknown bit of info when they discover it. Also, make sure they’re communicating openly with you. How solid are their terms? What kinds of variables or factors could cause them to change them prior to closing? I believe everyone has a built-in bullsh*t detector. If you’re having an open dialog with someone about your construction financing, I think you can sense when what they’re saying is true or not. There are ethical lenders out there, so just do your part to sniff them out.
In the interest of keeping this shorter, I’ll stop there. I’m already getting the sense there could be a part II or III to this post in the future, as there are so many issues like these I see. But in the end, you remember what your grandmother told you? “Don’t believe anything you hear, and only half of what you see.” It’s wise to be cautious, so that you don’t fall into any of these traps. If you’re looking for a capital partner who will tell you the truth, talk openly and honestly with you about your situation or project, and get you the best deal possible with transparency and authenticity, then give us a call. Words other clients have used to describe their interactions with us are often- “refreshing, enlightening, no-nonsense, clear, and educational”. See for yourself by CLICKING HERE. We’d love to show you how we’re different.