Building Good Banking Relations Takes Time

Posted on December 7, 2010

Successful real estate investors know that the two things most likely to produce favorable responses to wholesale offers are cash and your ability to close quickly. To be able to use these advantages, you’ll need to develop a good support team consisting of Realtors, appraisers, attorneys, insurance agents, and property managers, but there’s no relationship you can develop that’s more important than good banking relations.

Although you will use numerous sources of funds to purchase real estate, banks without a doubt provide the largest financing source for individual investors. While not mandatory, good credit definitely makes buying investment properties easier. It requires establishing a bond of trust, demonstrating responsibility, and developing a good record of accomplishment. However, building good credit takes time . . . lots of time.

The biggest reason it takes time is the cyclical nature of the economy. Just because you have a great track record through a boom period, it does little to establish your ability to perform during recessions, and recessions are usually when the best real estate deals can be found. Until you’ve been through an entire economic cycle, bankers won’t view you as a professional investor. They know that most anyone can do well during a boom period; it’s the ones who go through a down period without missing a beat that make the most attractive clients for the banks.

Here are 8 tips to help you establish great banking relations:

1. Be Honest. Don’t pad your financial statements and paint rosy pictures that you can’t deliver. It only takes one false statement to make future statements suspect for years to come. Furthermore, providing false statements to secure credit is illegal.

2. Pay in a timely manner. Establish a record of paying on time and regularly. Everyone knows that you need to pay your bills on time to establish good credit, but how you pay on time is just as important. Technically, payments made 10 days early some months, on the due date other months and just before they become past due other months, are all “on time,” but when reviewed, that payment record is not as good as one in which payments are consistently made within a day or two of the same date each month. Consistent payments indicate you aren’t dependent on this months rent to make your payments.

3. Keep you bankers informed. Whether it’s good or bad, let them know how you’re doing. Don’t make them have to ask for financial information. There are so many mistakes made in real estate investing that bankers tend to be very cautious about letting new investors become over leveraged, even when the debt is well secured. If you’re doing things right, there’s no reason not to ease their caution by keeping them informed.

4. Build cash reserves. As quickly as possible, build up a cash reserve that will let you make payments on time even if rents are late. A good rule of thumb is to maintain enough cash to cover 3-6 months of expenses even if you have no income. This may seem like a lot, but you can do it in a few short years by allowing your profits to accumulate.

5. Maintain your properties. Professional investors know that a deal is not a good deal unless the income from the property will allow you to set aside cash reserves to handle maintenance, especially deferred maintenance. Money for big ticket items, like roofs, carpet, heat and air conditioning systems that only need to be replaced every several years must be reserved to avoid getting in a cash flow bind when they come due.

6. Take your bankers for a ride. As your real estate portfolio grows, periodically invite your bankers to go with you to inspect the properties. By doing so, you will be showing them that you are acquiring good properties and keeping them in good condition. If you buy run-down properties that need fixing up, make before and after pictures so you can show what you’ve done.

7. Be fair. Understand that bankers are businesspeople just like you. They have to make a profit too. Their job is to get the best return for the bank, while yours is to get the best deal for you. While you may be able to squeeze them and shave an extra quarter point off the interest rate occasionally, deals that only benefit one party don’t build lasting relationships.

8. Don’t put all your eggs in one basket. Again, keep in mind that banks are businesses too. Smaller community banks may have more flexibility, but these banks also have smaller lending limits. Larger banks that can handle any size transaction tend to be less flexible and credit decisions are often made by analysts who never meet the customer. These are just a few reasons why you should develop relationships with more than one bank. In time you’ll learn that banks appetite for real estate loans ebbs and flows. The bank that would do anything for you this year may not want to do anything next year and it has nothing to do with your or your credit. They may be simple overextended with real estate loans.

The longer you follow these suggestions, the stronger your banking relations will become. Don’t think of bankers as adversaries. Many people’s first reaction when a loan request is turned down is to blame the banker. The truth is bankers want to make loans as much as you want them to, but they want to make good loans that they can put on the books and forget about.

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