Many new investors wanting to know how to buy an apartment building do not adequately prepare themselves before contacting an apartment mortgage lender and submitting an apartment loan application. This leads to a high level of rejection for the new investor, and a lot of wasted time by the lender’s underwriting staff. The following guide outlines the steps a new borrower should take before attempting an apartment building purchase. Here is some information on how to buy an apartment building that can help the borrower before applying:
- Credit Rating. If a borrower has open credit problems, such as currently delinquent mortgages, judgements or tax liens, almost every conventional lender will issue an immediate rejection. Any and all such issues should be resolved satisfactorily before application. Borrowers should prepare a written explanation explaining all such issues clearly. Lenders may consider these applications if the issues are resolved and in the past. If any issues are recurring or likely to reoccur, the only option for the borrower would be a higher rate, private, or hard money loan. Conventional commercial lenders do not want to get involved with such a borrower unless all such issues are “in the rear-view mirror”.
- Net Worth and Liquidity. Lenders today demand that a borrower has sufficient net worth and cash liquidity (post-closing) to qualify for a loan. Lenders do not want a borrower to invest all of his available cash into a property and leave nothing in reserve in case of emergency. Let’s say a borrower buys an apartment building and the roof needs to be replaced soon after purchase. Without adequate remaining cash reserves, the borrower would be stuck. Lenders will expect to see about 5% left in reserves, post-closing, to cover such potential emergencies. In addition, lenders will want to see sufficient total net worth before making a loan. Many lenders require some degree of a personal guarantee from the borrower. If the borrower does not have sufficient net worth, they will not able to cover the necessary guarantee. Most lenders will expect to see that a borrower has net worth at least equal to the new loan amount.
- Management Experience. One of the first items lenders look for is a borrower’s experience owning or managing similar properties in the past. Let’s say a borrower wants to buy an apartment building but has never managed a similar property in the past. Most lenders will not entertain such a request unless the borrower is willing to hire a professional property manager or key employee who has a demonstrated ability to manage the subject property. Lenders are not willing to take the chance of a new borrower learning on the job. A borrower will need to furnish a resume detailing his past experience. Additionally, if the borrower has failed in the past, as demonstrated by a foreclosure or short sale, a lender will expect to receive a well written letter of explanation before giving the borrower another chance. Don’t go in blind and hope that a lender won’t uncover past problems. They will, and it will only waste everyone’s time and money.
- Meet the Lender’s Guidelines. Before you apply with a lender, make sure to understand and meet the lender’s guidelines. Lenders typically lend up to 75-80% of the purchase price of the apartment property. The days of lenders making 90-100% loans are long gone. Lenders have guidelines concerning the amount of a loan, the locations where they lend, the types of loans offered, etc. Make sure to understand a lender’s guidelines before submitting a loan application. Make sure the lender offers the type of loan you are seeking. Lenders do not want to waste time looking at loan applications that do not meet their lending objectives.
- Prepare a Professional Loan Package. No lender wants to waste hours of time wading through reams of useless paperwork to ascertain whether or not to make a loan. If a lender does not understand your request within 2-3 minutes, the loan will be passed over in favor of someone else’s application. The typical lender receives far more applications than they can actually close. This means that a lender is not going to waste time on your application if the loan request does not stand out and demand attention. Your application needs to state all of the important information clearly and concisely. Most first-time applicants do not understand the importance of a good loan package. Many worthwhile loans have been rejected because the borrower did not present his request properly. A well-prepared request will contain the following: cover letter or executive summary explaining the transaction and the loan request, borrower’s personal financial statement showing assets, liabilities, net worth, and real estate owned, summary of operating income and expenses, current rent roll, pro-forma, and digital photos.
- Be available to answer questions. Lenders will invariably have questions after they review the initial submission. Make sure the lender can reach you easily. If a lender gets no answer, a child answering a home phone, or a mailbox that is full, they will likely move on to the next deal. Most importantly, do not make up answers you think the lender wants to hear. Answer truthfully. If you do not know the answer, speak to the real estate agent or seller and find out. Don’t assume anything. Wrong answers upfront usually derail the loan process later after lots of work has been done.
We are often asked, “How do I buy an apartment building”? Buyers looking to buy an apartment building should get professional assistance upfront. Many borrowers opt to engage the services of a competent and experienced commercial mortgage broker to represent them. A good broker will understand the loan process, and know which lenders to approach. An experienced broker will understand how to prepare a loan package that covers all of the necessary information in a concise and well written package. He will understand each lender’s guidelines and requirements and choose only those lenders that are likely to approve the loan on terms acceptable to the borrower. He will be expected to demonstrate a skill set that the borrower lacks, since the broker does this as a profession. Most importantly, he will guide the transaction from start to finish ensuring that both a lender’s and borrower’s needs are met in an expeditious manner.
If you are looking to invest in commercial real estate or purchase an apartment building, and are looking for financing, we look forward to speaking with you. Please call us today at 1–877–548–9454 or get a Free Quote.