Real Estate Finance Solutions
Solving Real Estate Finance Problems
While the importance of real estate to national economic health is widely accepted, the value of reliable real estate finance solutions appears to have been lost in the shuffle of persistent financial chaos during the past several years. Some practical and candid thoughts about how to solve common real estate finance problems are presented in this article.
There are indeed risks, costs and benefits to evaluate when seeking realistic answers about real estate financing. An equally important challenge is to recognize that some of the financial obstacles are more difficult than others and will require more persistence in tackling them successfully.
Finding the Good Banks
Avoiding the Bad Banks
While saying that it is necessary to find the good banks and avoid the bad banks, it must be emphasized that this is by no means an easy task in today's chaotic banking environment. First of all, there have been massive changes in both banks and real estate markets. Second, the presence of banking institutions referred to by such names as "Problem Banks" (by the Federal Deposit Insurance Corporation) and "Zombie Banks" should be a revealing clue about some unresolved bank issues.
Real estate and banking have been on a collision course for several years.
Understanding Real Estate Investing
Real estate is a "bricks and mortar" subject, and this is a bricks and mortar explanation of key real estate formulas and concepts. If you want to learn more about the "need to know" elements that continue to be important for understanding real estate, you should read and then re-read this book.
Financial Help for Problems Related to Lenders
A good starting point for addressing real estate finance problems is to recognize to what extent external funding is needed in the first place. Although popular media gurus have been preaching about the wisdom of "no money down" and "using other people's money" for a few years, it is gradually becoming more obvious just how wrong they were. Just as our parents and grandparents learned in the Great Depression, using little or no debt is a preferred path to follow.
If a buyer of real property decides that they nevertheless either need or want to use debt in their purchase, they will need to identify a dependable funding source. While this might change as we move forward, banks have acted as a major provider of real estate loans. The nature and quality of banking institutions has changed markedly during the past fifteen years or so, and it is now mandatory that a potential real estate borrower ask a series of questions about their bank financing partner prior to the acquisition.
Bankers will rarely pass up a public opportunity to talk about the strength of the banking industry. However, there is plenty of conflicting data to suggest otherwise. More than one observer has referred to "Zombie Banks" after looking realistically at the assets and liabilities of some of our biggest financial institutions. Real estate finance consulting experts have been telling us for years that consumer and business debt was accumulating at a rate that was not sustainable. The Federal Deposit Insurance Corporation (typically referred to as the FDIC) has a monitoring list that keeps track of troubled banks, and the number has varied from around 250 to 800 for the past few years (compared to 50 prior to 2007).
Using little or no debt is a preferred path to follow.— Stephen Bush
A reverse mortgage is more debt and one of the most expensive forms of credit you can get.— Carolyn Rosenblatt (Forbes: The Hidden Truths About Reverse Mortgages)
Real Estate Finance Strategy
In a nutshell, a prudent real estate finance strategy designed to work under current circumstances can be summarized as follows:
- Find the good banks.
- Avoid the bad banks (and be prepared to fire your banker if necessary).
- Evaluate the good bank candidates.
- Determine which good bank(s) will actually provide the needed real estate loan.
- Negotiate to achieve the best real estate financing terms that are available.
The Federal Deposit Insurance Corporation (typically referred to as the FDIC) has a monitoring list that keeps track of troubled banks, and the number has varied from around 250 to 800 for the past few years (compared to 50 prior to 2007).
FAQ - Real Estate Finance
Answers to Common Real Estate Loan Questions
Question 1 — I have seen reports suggesting that there are significant regional differences in locating reliable real estate loans. How much of a factor is location in finding both "good banks" and the best real estate finance terms?
Please understand that I am not attempting in this article to tell anyone that a specific location or region is better than another for buying real estate. The focus here is on finding and evaluating real estate finance options once you have identified real property that you want to buy.
All regions of the United States continue to have a diverse collection of "bad banks" and "good banks." No matter what location you are contemplating, this distinction will still have to be made. I am consistently finding very few regional differences for real estate financing in general. This does not necessarily mean that a viable local or regional bank is present in all locations. There are numerous recent examples where I have been forced to use lending sources that are outside of the region where the property is located.
Question 2 — In successfully finding practical and realistic real estate financing, what are the most likely costs that should be managed and negotiated?
The cost area must be monitored very closely and selectively. Some costs such as those for appraisals are going to occur in each situation and are not prime costs to target for management and negotiating. One of the biggest potential costs will be "points" charged by loan brokers. My view is that these costs should be eliminated totally rather than negotiating them at all.
It is also important to avoid selection of a lender by pursuing a "low bidder" mentality. As noted in the section above, there are several critical steps that should be pursued in the successful search for real estate finance solutions. To effectively navigate through this potential maze of confusing choices, it can be prudent and cost-effective to enlist the help of a real estate finance consultant. Given the potential value of such a real estate financing expert, do you really want to select and hire this person based upon whether their services are "free" or represent the "low bidder?"
To reiterate an earlier point, managing and negotiating costs is important but it is not enough! As described above, lenders must be found, avoided and evaluated. To emphasize costs too much will create a selection process that leaves out too many essential steps.
Avoiding Bad Banks and Finding Good Banks
All regions of the United States continue to have both "good banks" and "bad banks." Any list of "good banks" is very short (and has become even shorter since 2008). The "bad banks" list has stabilized at a high level (there are more banks in this category than anyone should find comfortable).
An excellent source of explanations about what is going on today in the real estate market. Realistic and practical perspectives that anyone interested in succeeding with real estate investing should master beforehand.
One More Thing (Make That Two)
1 — Even if you are using little or no debt (strongly endorsed above) in your ownership of either residential or commercial real estate, it is still essential to monitor what is going on with regards to real estate financing. One of the biggest impediments to a healthy real estate market is the ongoing poor performance of banks in providing adequate real estate loans. This is especially obvious with refinancing of commercial mortgages. Just to give us another dose of reality (not a bad thing at all), the Federal Reserve announced during 2012 that about 20 percent of the biggest banks failed a "financial stress test" designed to measure the ability of banks to sustain another severe economic downturn.
2 — The Same Old Story: When the Federal Reserve imposed the stress test again on 30 banks in 2014, the failure results still hovered around 20 percent.
By the way, the Federal Reserve continues to impose a "stress test" on leading banks annually. For example, this included 31 major banks in 2015. But this is only a "test" that uses hypothetical scenarios such as stock market declines and declining home prices.
One lesson to be learned — real estate investors should review expert sources such as this book in order to have a better chance of succeeding in the "New Economy."
Warren Buffett Talks About Real Estate
Real estate problems cannot be discussed without including banks in the discussion. Are banks the problem?
Banks, Problems and Risks — The Ongoing Need for Plan B Strategies
If small businesses didn't need to worry about banks, I might have to find a new line of work because banking challenges constitute well over half of my professional time. The remainder of my activities are focused on problem-solving and risk management that do not involve banks.
The ongoing difficulties involving banks are serious ones for small businesses. Many of these are recurring risks and problems that keep coming back. It is always preferable to prevent problems rather than solve them. As Albert Einstein once observed: "Intellectuals solve problems, geniuses prevent them."
Because something often goes wrong when you least expect it, formulating Plan B strategies in advance can act like an insurance policy that kicks in when disaster strikes. This is a sound and practical solution for minimizing risks and problems when they cannot be prevented.
Reading this book will be an eye-opening experience for many readers — especially if you still doubt the problematic role that banks play in our real estate economy. Are today's banks more likely to create a financial crisis or solve one? "The Problem with Banks" will help you formulate a detailed answer.
All problems become smaller if you don't dodge them but confront them. Touch a thistle timidly, and it pricks you; grasp it boldly, and its spines crumble.— Admiral William F. Halsey
© 2012 Stephen Bush