WHICH BANK SHOULD I USE?

Recently I was having a conversation with a young investor. She was fairly new to the business and was complaining that she was having difficulty in getting a loan with her bank. I asked her which bank she was using. She replied that she was using Chase Bank. Well, that was her first problem.

When my partner, Kevin, and I were doing our first deal together the property was a bit unusual. It was zoned as mixed use meaning there were two apartments in the back and a third storefront unit in the front. Kevin is a realtor dealing mostly in residential properties. He talked to three different lenders that he typically works with when arranging financing for his clients. All three lenders turned us down, primarily because they did not want to lend on a property zoned for mixed use.

When the third lender turned Kevin down, he called me. I happened to be walking into Tri Counties Bank on other business when he called. We had opened an account with them a few weeks prior when we set up the escrow on this property and formed our LLC together. They are a small regional bank located in the Central Valley of California with just a few offices. I wasn’t intending to see a lender that afternoon but, since I was there, I asked if I could speak with one. I met Jeremiah and explained our situation; gave him the cost, listed our expected monthly expenditures, income from rents, etc. He said that the Bank’s position was, if the numbers make sense, then let’s do the deal. He would have to do his homework and check our numbers but, based on what I had told him, he said this deal was a no brainer. Of course we had to supply plenty of documents; personal and business tax returns, list of real estate owned, credit reports, etc. That first loan was a long process but, in the end, we got the loan with Tri Counties. Since then, we have gone back to them for five or six other loans and, because of our pre-existing relationship, the loan process is much more stream-lined and faster.

As a small investor you want to stay away from the larger banks. Target your local regional banks that have only a few or maybe even one office. They don’t have the hierarchy that larger banks do and can make decisions much more quickly. They also have a vested interest in the local community and want to work with local investors. At Bank of America you’re just a number on a spreadsheet. You can go into a local branch office and talk to their lender but, at the end of the day, for any difficult decision, he has to call corporate. Not only does that take time but corporate has an entirely different agenda than you do. They have a strict framework by which they will make loans and if you don’t fit within that framework, i.e. you need to get a loan on a mixed use property, they will probably deny you.

So how do you determine which bank to use? Do your homework. Start by doing a Google search for local regional banks in your county or city. Call several of them and conduct an interview over the phone. When on the phone, ask the bank representative if they work with local small businesses. Ask about any fees they charge. Do they have a minimum balance requirement? Is there a monthly maintenance charge? Do they charge for using an ATM or overdrafts? Some banks charge a fee when you make a cash deposit. Ask him about that. Make sure you ask about discounts. Some banks will waive a lot, if not all, of their fees if you have served in the military.

Ask if they do real estate loans and offer lines-of-credit. Do they offer on-line banking and a banking app for your telephone. I keep apps for every bank and credit card I use on my phone. Both personal and business. I can be anywhere and check account balances, transfer money, view canceled checks and pending transactions, pay bills, and track job expenses on credit cards. Also ask them if they provide debit cards and if those cards are free. And a very important question is to ask them is if you will personally know and work with your banker. From those interviews, choose two or perhaps three that you might be interested in working with.

Once you have done your homework and narrowed your list of banks down to two or three do a follow up call. Make an appointment to meet the banker in charge of small business lending and/or real estate loans. Do not just show up and ask to speak with the banker. His/her time is important. You will be interrupting their schedule. The day I met with Jeremiah at Tri counties I did break that rule. But I was courteous enough to take up as little of his time as possible and I scheduled a meeting for later in the week whereby he could meet with both myself and Kevin and discuss our needs in more detail. When you go to the meeting, be on time and dress appropriately. Remember you are representing your business and this is the first time he/she will see that business. First impressions are very important.

Speaking of first impressions, if you are uncomfortable or intimidated by the banker then that may not be the bank to use. This is hopefully going to be a long-term relationship, so you want to be sure that you are working with someone you feel comfortable with. Remember, they want your business. You will make the decision as to whether or not you will use that bank or go somewhere else. You are doing them a favor, not the other way round. Not only do you want to make a good first impression on the bank, it is probably even more imperative they make a good first impression on you. I find small talk is useful. When I went into Tri Counties that first time, I noticed that Jeremiah had a lot of baseball memorabilia in his office, so I asked him about that. Turns out he was a big San Francisco Giants fan. I’m a big Los Angeles Dodgers fan myself so we found that common ground. We hate each other’s guts. That was in the midst of the Giants streak of winning three World Series in five seasons. They weren’t having a very good season that year so I tried to needle him about that. He simply reminded me that the Dodgers hadn’t won a World Series since 1988. Good times!

Introduce yourself. Look around the office for family photographs or other personal items that will give you a clue as to their interests. Comment on these items, be it family photos or a collection of memorabilia. People love to talk about themselves and they will open up to you if you talk to them on a personal level. You will find it puts both of you at ease, especially if you have common interests. Tell them about yourself and your background. and a little bit about your business. Try to keep it short and to the point. Personally, as anyone that knows me will tell you, I have a tendency to run off at the mouth. Sometimes less is more.

After introductions you’re going to want to get to the meat as it were. Ask them about their loan rates to see if they’re competitive. What loan to value ratio do they use. Most banks will loan you 75% of the appraised value of the property. Some will only loan you 70%. Obviously, you want to go with a higher rate. Ask them about terms. Do they have a prepayment penalty. Tri Counties Bank loans on rental properties are typically amortized over 25 years with a balloon payment due in 10. They’re pretty lenient on that and will allow you to refinance the loan at the 10-year mark.

You will want to ask them about loan fees. This could include points, appraisal fees, and all closing costs. Ask about other types of loans. For instance, do they offer lines of credit. Generally, banks will offer a line of credit at around 50% of the value you have on any properties minus any outstanding loans. For example, you have two properties that are both worth $200,000. One is free and clear while the other has a mortgage balance of $100,000. Combined the properties are worth $400,000. A line of credit would be 50% of that number, which is $200,000, minus the $100,000 loan so you should be able to get a line of credit of around $100,000. Also ask them if they do SBA loans and what kind of terms they offer.

Remember, stick with the small regional banks. They are easier to work with, quicker to react, and have a vested interested in the community. Do your homework. Talk to several banks on the phone and narrow the field to just a few banks. Schedule a meeting with the banker and question him/her about their policies and requirements. In the long run it will make your life a whole lot easier and your business a whole lot more profitable.

For my next blog I will be switching back to baseball. I call this one “Who was Moonlight Graham?” if you are a fan of the movie Field of Dreams or the book from which the movie was adapted, Shoeless Joe, the name will be very familiar. But there is a story behind that character and it is a very interesting story. As it turns out, Moonlight Graham was more than a fictitious character in a book about a fantasy baseball field where the ghosts of long dead ballplayers had a chance at redemption. Moonlight Graham was a real person. If you are interested in the history of the game, I think you may find this very interesting. It will be a two-part blog. Hopefully I will be posting both parts next week on different days. In two weeks time I’ll come back to real estate. Since we’re discussing banking, I thought I would do a blog on working with hard money lenders. That’s a little bit different animal than your standard bank. Make sure you leave some comments, it’s the only way I can tell if I am connecting. Also, when you come to the site, if all you are interested in is the real estate side, just click on the drop-down button next to the blog heading. Click on real estate and It will take you to the page dedicated to real estate with this and past blogs. Good investing!