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	REALESTATE INVESTMENT FORUM
	"Real Estate Investment Analysis And Beyond"  Copyright 1999.  All rights reserved.
	Institutional Financing Techniques If you know the variations possible with the loan correspondents, and the institutional lenders they represent, you can increase the chances of creating the financial leverage you need. By understanding the symbiotic relationship that exists between the borrower and lender you level the playing field in a complex financial game. Any lender will look more favorably upon a loan application that demonstrates a clear command of the data presented with a clear plan for implementation, particularly if viewed to be profitable with minimal risk. Even if the borrower's is not within the lender's sphere of influence, or authority, it may form the basis of a profitable relationship with little change in the proposed financing. Just as the real estate investor is affected by outside market dynamics the lending industry, more than most any other business group, is at the mercy of government politics and changing monetary policy. A borrower's proposal no matter how unique, or demanding, may prove to be acceptable since all lenders are continuously reinventing and repositioning their mortgage products to meet the demands of a dynamic and competitive marketplace. New and innovative ideas are moving across traditional barriers faster than ever in the new pardigam of computer technology. Alternative financing techniques are no longer confined to the realm of conventional wisdom, but instead driven by the lender's competitive need to creatively meet the demands of their customers. Any loan officer will look more favorably on someone who applies for a loan with a sound plan especially one that  maximizes profit and minimizes risk. .Techniques used in one market can often work equally well in others and just because they haven't as yet been introduced doesn't mean they are unworkable. Lenders want to make loans that are risk-free and profitable. Any application for funds that you make must be designed to meet your objectives. While your proposal may not be within the current scope of the lender's  underwriting policy you may still establish the basis for a relationship.
Wraparound Mortgage	A wraparound mortgage is an excellent method of obtaining a high loan yield without the usual requirement of lending the full face amount of the loan in cash. It is a method of refinancing and cashing out the seller without paying off the current loans. For example, an older center priced at $400,000 with $100,000 down subject to an existing $100,000 first-mortgage-bearing 7% interest is a likely candidate. The new first mortgage is written subject to the existing first mortgage and "wraps around" it. In some areas this financing procedure is referred to as "all inclusive" and is set up with trust deeds. You make loan payments to the new lender who is responsible for making the payments on the existing 7% first mortgage. The new loan has a face amount of $300,000 bearing 9% interest, but the new lender is required to provide only $200,000 cash. The additional $100,000 is covered by the first mortgage already on the property. Therefore, the lender collects 9% interest on the new $200,000 cash and an additional 2% interest on the $100,000 represented by the existing loan-$100,000 in capital the lender did not have to supply. This approach is a solution to tight money and provides an incentive to the lender with no increase in acquisition costs. The wraparound lender is fully protected. The seller cashes out his position entirely and you are able to leverage the acquisition by establishing financing that might not otherwise be available.
Open End Mortgage	An open end mortgage is simply a provision in the note which allows the borrower to request  that principal be added to the note based on an increase in the value of the property.  A refinance without the "brain damage" associated with a formal application allowing the borrower to generate non-taxable cash flow.
Lender Participation	If you are reading this you are probably a small investor, so look for a small bank.  There are many of them in the community where you live. This technique provides any form of lender participation which adds profit and adds security to the loan.  The lender can participate in the income stream, profit from the future sale or any combination of cash benefits which meets the needs of the principals. A good property and a good plan will often cause the lender's representative to move closer to your side of the desk. This technique allows a developer to arrange financing in a tight money market by providing an incentive to a lending institution through equity participation at the buy-back point. The developer buys the land back on paper and uses the cash from the sale to develop the property.
Check the Lender's Inventory	All lenders have "real estate owned" inventory  Most REO property has been acquired the hard way through foreclosure, or voluntary return by the borrower.  Banks are neither good property managers, or investors. And rarely seek willingly to be either.  The REO list is available upon request, and with only this knowledge you are ready to to deal effectively with the purchase and financing of  the REO property of any lender.
Use Cash To Secure The Loan	When a lender is reluctant to refinance property, offer to deposit a portion of the refinance proceeds in the form of a certificate of deposit (time deposit). Redepositing funds from a loan or opening an account with a sizable deposit can often make the difference between getting a loan and not. Using only part of the proceeds of the refinance to acquire additional real estate is better than not being able to raise the funds at all. Banks and savings and loans need deposits. If you can arrange deposits, chances are that your loan application will get a higher priority than that of someone who can't. The lender benefits by putting a new loan on the books, while concurrently obtaining additional deposits. In times of rapid savings withdrawal, this type of incentive makes a real difference in the decision as to who gets a loan.
Collateral Assignment	This technique is designed to help when you negotiate a first mortgage when the property, or the borrower is perceived by the lender to be weak with added risk.. Additional property is offered as security for the loan and may be in the form of real, or personal. Whatever it takes. This technique can help you obtain a loan at a "higher loan to value" ratio. In certain situations, it can increase your leverage and significantly improve your return.  But don't encumber good property if you  believe there is added risk.
Compensating Balances	The Guide discusses loan reserve requirements in detail. Many lenders will loan money when they are assured of receiving compensating balances equal to the amount loaned. This allows a bank to maintain the required reserves in situations when the reserve requirement is in delicate balance. Helping lenders meet the requirements imposed by regulatory agencies and corporate policy is often the only way to get the cash you need. A solution that is quite effective involves arranging the deposit of compensating balances by a third party. Your line of credit is therefore offset by compensating balances placed with your bank through a third party, and is often accomplished with the cooperation of a business, or strategic partner.
Reverse Pledge	A reverse pledge states that you will not encumber or dispose of any of the assets listed on your financial statement without written permission of the bank. If you violate the pledge agreement, the loan automatically becomes due. If the he bank is lending money based on the strength of a financial statement it my want to insure the borrower does not dispose of, or encumber those assets. . Therefore, with a reverse pledge the lender  is ensuring that the basis is secure.
Borrow Credit	A letter of credit is a useful acquisition tool.  It is a document issued by a third party which promises to perform on the borrower's behalf based on the terms and conditions of the letter. It is issued for a fee and acts like a loan, or bond,  if exercised. A letter of credit can fit into a variety of situations. For example, it is advantageous when a financially weak but energetic entrepreneur is backed by a financially strong investment partner or group of partners. The backer does not have to come up with cash unless the limiting conditions in the letter of credit are met. A letter of credit is usually exercisable only after a certain date and only if certain agreed events occur. When used as earnest money it may, for instance, be exercised only after a commitment for financing is secured. If the limiting conditions of the purchase agreement are not met by a certain date, it expires automatically. The key is to never exercise the letter of credit but gain time with it to arrange financing. Attempt to mortgage out before the letter is collectible or purchase property for resale and turn it over at a profit without exercising the letter of credit used as earnest money. For a seller, the letter of credit is solid protection in the event of default on the purchase agreement. When you're acquiring property with it, it is an effective method of providing earnest money consideration with someone else's line of credit.
Advance Payments Deposit	You can sometimes convince a lender of your ability to repay a loan by depositing a certain number of the monthly payments at the time the loan funds are disbursed. For example, your agreement might require deposit of the first year's payments at closing and the second year's payments at the beginning of the second year. You would actually be paying monthly payments in advance annually. This technique is a way of buying time to establish credit in a new location. It's designed to demonstrate to the bank that, although your credit may not yet meet requirements, the source of loan payment funds is clearly established. The purpose here is to offset weakness in credit history by strengthening the payback method. Keeping in mind that lenders look to credit history and a source of payback funds, this is one way of combining the two so the end result is adequate to get the loan you need.
Move Seller's Account	Since the seller has an interest in the success of your loan, consider ways you can work with him to get the money you need to buy his property. Banks like to make loans when they get additional deposits, and, in some cases, they require the checking accounts of the people to whom they lend. The seller may be more than willing to change banks if he knows that is what it will take for you to buy his property. Will it help get the loan? That, of course, depends on the size of the account and competitive stance of your bank. In growing areas there are usually young banks in real need of new deposits. It can be a pleasure to borrow money when banks are in competitive battles-they can be quite accommodating. If you're not working with a competitive lender consider moving elsewhere. In any event, if you are able to attract a new (and substantial) customer to your bank as a result of buying real estate with the money you borrow, you have a distinct advantage. The bank benefits on two counts: a new loan to you which yields a new customer for the bank-the seller.
Account Transfer	When you are considering the transfer of business to the lender, don't overlook savings of relatives who may want to see you succeed more than they want their current bank or savings and loan association to profit. Transfer of an account can often be done without inconvenience to your helper and be timed to prevent loss of interest. You may not think a new account is significant but banking is becoming increasingly competitive and loan officers earn management recognition when they bring in new business. If you help a loan officer build his business, chances are he will be more inclined to help you get your loan approved. Sizable loans must go through loan committee approval. Every person you can get on your side can contribute to a favorable decision and approval of your loan request, and, when you bring a new deposit with your loan application, it's one more plus on your side.
Blanket Mortgage	A blanket mortgage is one note and mortgage that encumber two properties. It is used when the primary property borrowed against is not sufficient security for the size of the loan. Release of the additional security is normally provided for when the loan is reduced to an agreed amount and should be written into the mortgage terms. One of the requirements for obtaining any real estate loan is demonstration that there is virtually no risk for the lender. A blanket mortgage is a method of substantially eliminating risk. In many cases it actually over secures the loan, and that's what makes lenders happy. With this technique you sign one note and one mortgage which encumber two separate properties. The additional real estate is essentially a method of making up a deficit in equity, and this is the clue to using a blanket mortgage as an acquisition method. In the best of situations the property used as added security will in effect serve as a down payment (your equity). Consequently, the loan amount may be large enough for you to totally finance the new acquisition. The end result of the procedure is to provide sufficient security for the lender to make your loan. You can accomplish the same thing by selling your additional security property and making a down payment, but that would not be a wise business decision because of the tax consequences and loss of appreciation. Furthermore, it's not necessary when a blanket mortgage can be used to meet the lender's security requirements and provide the equity security you need to make the deal.
Participation	Participation is syndication of a loan among two or more lending institutions. It spreads the risk and allows small lenders to participate in a larger loan than would have been possible otherwise. It benefits the larger institution in essentially the same way by also reducing the risk. Generally, two banks or thrift institutions join together to provide funds when one does not have sufficient reserves to undertake the project alone. Their mutual objective, of course, is higher profits at reduced risk. If the loan you request is too big for your bank, participation with a larger institution may help out. It may take a lender from out of town to do the job. Corresponding banks in different cities have relationships designed for mutual benefit. If you live in a smaller town and have a big project, loan participation may be the solution for your plans.
Employer Influence	Having real trouble getting the loan? Banks don't like to lose business. Maybe a little pressure from a major depositor such as your employer would swing the deal. This can often work smoothly with small banks when competition is rough. This type of approach is the other side of providing compensating balances. Instead of bringing business to the lender, you arrange for him to keep the business he has. Obviously, banks don't want to lose large accounts and normally do everything possible to make their clients happy. The exception to this general rule occurs when they are poorly managed, which does occasionally happen. In any event, a little influence from a friend or employer who is a major depositor may provide the incentive for the success of your loan application.
Joint Venture	Joint venture development projects are becoming increasingly popular as land and improvement costs escalate. The lender and developer enter into a profit-sharing partnership for development of a project such as lots in a residential subdivision. Usually the lender or its holding company will contribute some equity in the land and provide some development financing and permanent financing for the home buyers. The developer will also have an equity position in the land and handle all of the lot development engineering and preparation of the subdivision for sale to individual buyers. Consequently, expertise and financing combine to produce a ready-to-build package for smaller builders. The joint venture group realizes the profit from lot sales and in the process provides an invaluable service. Smaller builders are dependent on large companies specializing in packaged land sales. The tremendous increase in raw land costs combined with regulations for open land and environmental protection have forced all but the largest companies out of subdivision development. Joint venture projects have helped solve this growing problem and worked to keep lot costs within practical limits.
Split Due Date	This technique is used on older property or in situations where there is concern for the long-range economic stability of the area. The lender is protected by requiring full payment of the loan balance halfway through (or sooner) the amortization schedule. This may appear to be a burden but you can cut the amortization term in half by paying an amount equal to the principal due each month in addition to the regular payment. The net effect is to pay off the loan before the halfway due date by increasing the payments each month by the amount of each principal payment. Although the due date approaches fast, you do have flexibility and time to get the rents up to cover the payments without cutting into cash flow. This type of loan is designed to accomplish another profit-oriented objective of the lender that sparks its use with new property. The stated policy is to renew the loan at the halfway due date, but for a fee and at the rates in force at that time. Therefore, the lender is not locked into an interest rate established years earlier that is much below future rates. It's also an opportunity for the lender to turn over loans more frequently and increase the net return of each loan investment. It's a more profitable loan for the lender and with strong cash flow can be a helpful refinance method.
Stock Switch	A lender with a stock offering that's going slowly is a lender who needs help. Offer to buy some stock if he or she will make your loan and thereby free up the cash you need to make the stock purchase. But do it informally so it won't be construed as a loan fee. Again, this is one more back-scratching method. Help the lender and he'll help you. A loan officer selling stock by direction of management is usually willing to negotiate. There are many ways to establish solid working relations with your bank. In the last analysis, though, they boil down to getting to know the people. If you're serious about acquiring real estate you must develop good banking relations. Stock ownership of the lending institution is definitely a foot in the door.
Standby Commitment	If you have a good project but permanent financing is not available or is too costly, look into the possibility of a standby commitment. It will allow you to get construction financing, build the project, and, if you haven't found permanent financing by then, you can exercise the standby commitment and pay off the construction loan. Commitments will often run as long as three years, giving you time to find permanent financing without making you wait to build and suffer the added cost of inflation in the meantime. A standby commitment gives your construction lender the security he needs to make the interim construction loan. It permits you to get the project started without delay. There's another advantage here as well. It's often easier to find permanent financing when the lender can see the project unfold. In any event the standby commitment can be a help when money is tight and the prospects are good that it will be more readily available later.
Balloon	If you are buying property that you plan to sell within three years, this technique can increase your yield. Structure the loan for the down payment so monthly payments are low and there is a balloon at the time you are ready to sell. Then pay off the down payment loan with the profit from the sale. When you structure this approach correctly, the return can be very high. You are able to borrow the entire amount of the down payment and then pay it off from the sale proceeds which flow from future appreciation. The property actually buys itself. The cash flow and ultimate resale proceeds are the down payment. You simply set up the transaction so the down payment is paid out of the profit rather than out of your pocket.This very effective approach is particularly applicable to certain  professionals and those engaged in service industries.  Doctors, lawyers, dentists, travel agents and the like provide high demand service which is easily exchanged for like kind. And parish the thought, most barter is exchanged without reporting for tax purposes. If you happen to be one of these people make this offer right up front.
Short Fuse	Commercial banks don't like to loan money for more than five years, and for a loan of that length they normally want security. Knowing this in advance can help you structure your deal to meet their requirements and plan for the cash flow you need to make the deal work. The most beneficial approach is to structure the transaction so the cash flow from the property will pay oft' the down payment loan in five years. If you can negotiate a purchase with this in mind and then take a workable proposal to the bank, you have a head start on getting the loan. Much of the success you have with banks depends on your loan presentation. When you're trying to borrow equity money (the down payment), thoroughness and accuracy go a long way toward soothing a loan officer's concern over risk. When the lender can see clearly that you know what you're doing, the level of risk associated with the loan drops drastically. Approach borrowing to acquire real estate the same way you would approach borrowing for a business. Commercial banks specialize in business loans. If you go in for a down payment loan with an income and expense history of the property and a projection of its future performance, a real estate loan begins to look more like a business loan, and that is what banks feel more comfortable with. Set up your loan request as thoroughly and accurately as you would for a business loan. Look at your personal financial statement as a company balance sheet. Structure the property history like a business profit-and-loss statement with a projection for the future. The more business-like your loan request, the more likely the response will be positive.You have found  a distressed or neglected property that offers excellent profit potential if certain improvements are added, but you don't have money for both the cash down and needed improvements. It is  either one or the other. This may offer the financing solution you need to put this excellent "value added" opportunity in you column. Try to work out an improvement agreement in which the seller carries the necessary paper and you make the improvements. This accomplishes many things for both parties. The seller gets a sale, a well secured loan and relief from the property. As the buyer you get the property and an increase in the cash flow resulting from the improvement and with added cash flow an increase in value. If the Seller wants to retain an interest in order to benefit from the added value then write a sale lease back agreement, or give the seller an option to repurchase all, or a percentage interest in the property, based on agreed upon terms pursuant to the completion of the improvements and return of the assets to full service.
Signature Loan	If you plan to borrow on a personal note with no amortization, make the application for less than an 18-month term. This is generally the limit banks like to go on signature loans. If your signature is security enough and the short-term due date is manageable for you, this type of loan is a good source of down payment funds. If you apply for the loan with a specific payback plan in mind, it makes it that much easier for the loan officer to approve the loan. There are two essential requirements which lenders must see in your loan request. First, there must be adequate security. Within certain limits your signature may be security enough if you are well-established in the community. Second, there must be a source of funds to repay the loan. Optimally the income from the property will meet this requirement. Possibly your salary will help also.
Bridge Loan	If you're moving out of town and don't want to wait to sell your old house before buying a new one, this might be the answer. Before you leave, arrange a short-term loan with a local bank for a portion of the equity in your house and secure it with a second mortgage. The due date should be set far enough ahead to provide enough time to sell your old house but would be due in the event the sale occurred earlier. Another approach is to borrow the down payment from a bank in the town to which you are moving, with the understanding that it will be paid when your old house sells. This is one application of a very helpful financing technique. When there is a time lag between two events and your funds depend on their concurrent completion, a bridge loan is a practical solution. The proceeds actually bridge the two points in time. For example, if the seller must close within 30 days but your financing is not available for 90 days, there is a 60-day time gap that must be covered to save the deal. A bridge loan is the way to do it.
Finance Company	An increasingly popular source of loan money is from finance companies. They recognize the value of loaning on homes that have experienced a high degree of appreciation and are willing to loan money on the difference between your first mortgage and 80 percent of the appraised value. This permits you to borrow back a portion of the first mortgage you've paid plus a percentage of the appreciated value of your house. The interest rates are high, but you can generally stretch the payout over ten years and if the funds are wisely invested the loan can be worth the cost. Although your home is solid security for the finance company, due consideration should be given certain aspects of the transaction. Will the profit from the investment of the loan proceeds pay the loan back, cover the interest costs, and yield a high enough return to justify the risk involved? Care should also be taken that you don't take a deep step into debt just prior to a major economic contraction. It's when the good times look like they'll never end that you want to be careful, especially with your home. Consider also that capital debt must always produce a solid investment return and never be used for consumer purchases.This is the ultimate in purchasing real estate without cash.  It is often ignored because the property owner either fears the process, or has become attached to the property owned. The Exchange Model shown in "Real Estate Investment And Beyond" demonstrates conclusively that maximum wealth, and particularly maximum cash flow, is the result of an aggressive exchange strategy.
Commitment Letter	If you must close an acquisition now but the mortgage rates are high and show signs of going down soon, a commitment letter may help you. First, get a letter of commitment from a savings and loan association agreeing to lend the money you need at today's rates. Then, go to a commercial bank and use the commitment letter as security to borrow the money to close. When the bank loan is due (six to nine months later usually), the rates for permanent financing may be lower. But, if they're not, you can exercise the commitment and live with the higher interest. The alternative is to let the commitment letter expire and apply for a loan at a lower rate. When a change in rates gets underway, the movement is fast regardless of the direction of the trend. Usually the turnaround points are reasonably identifiable and the trends in interest rate changes are obvious. If a change in trend indicates a lower interest cost a few months down the road, purchasing a commitment letter and setting up a short-term loan may be well worth the trouble.