Details Lenders Like to See - Sponsor Level Info
Sponsor Level Info Here’s the additional detail pertaining to the post on presenting your request to lenders
Today, I discuss some often overlooked items on the Personal Financial Statement (even by expereinced sponsors), preparing a Schedule of Real Estate Owned, and I try to convince you to prepare a short 1-page Bio. While the first two items are required by lenders like me, the last one is not; but it's really nice to have and it goes a long way in helping new lenders get to know you. Now, before you think, "I'll just stick with the lender who knows me," keep in mind that the more lenders you get to quote, the more competitive loan terms you may find. Additionally, your lender may not always be around. He/she may move elsewhere, their credit box might change, or their "bucket" might get full. So do yourself a favor and, to quote Jerry Maguire, "help me help you."
This email is a bit longer than the previous one (and probably longer than you care to read) but I promise you, it's useful! Even for experienced investors seeking to build new lender relationships. I tried to cut back as much as I could - I'm a "bullet-point writer;" but it's hard when there's so much good detail to discuss.
Personal Financial Statement (PFS)
Before you decide to not read this email, consider why I write on this topic. Not a week goes buy in which I'm presented with a PFS that lacks clarity, is missing information or whose figures just don't add up. It happens A LOT!!
So here are some quick and easy pointers as to how to correct some of the most common issues I see borrowers make when completing their PFS. This is from the perspective of an agency lender (Fannie Mae and Freddie Mac). Other lenders, such as banks who are looking to your global cash flow, may expect to see much more detail.
First tip: It's best to provide information that is current - at least within 90 days.
Second tip: In some cases, you should be prepared to provide bank statements to support the amount of cash you state on your PFS.
Third tip: Make sure your math and formulas add up!!
There are numerous PFS templates online. Some are much more detailed than others and include cash flow statements among other details. While more detail is great, an agency lender like me is looking for primarily two things: liquidity (cash and what you can convert to cash same day) and net worth (the value of everything you own and have an ownership interest in minus what you owe).
Assets
Let's start with Assets. You want to list all of your assets as this will establish liquidity and determine net worth. I've seen so many people exclude business assets or partnership interests and more.
Investopedia defines an asset as "a resource with economic value that an individual…..owns or controls with the expectation that it will provide a future benefit…..An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales….."
Cash on hand: State the total balance in checking, savings and money market accounts as well as Certificates of Deposit (CDs)
List CDs separately
IRA funds and 401k (disclose retirement funds as IRA or 401k. Most lenders typically do not count these towards your liquidity; however, they count towards net worth)
Do you have cash in pass-through entities in which you are the sole-member and own 100% of the entity? If so, list that separately as well.
Marketable securities like stocks & bonds (stock in privately held companies is not considered liquid but counts towards net worth - list that separately);
Non-Readily marketable securities: Securities that cannot be converted into cash quickly and tend to have maturities of more than one-year. This may include closely held, thinly traded or restricted stock.
Accounts and Notes Receivables: Loans that you have extended personally to another individual or business. This is not considered liquid but counts towards net worth.
Net Cash Surrender Value of Life Insurance: Cash surrender value of life insurance policies (ex. whole life, universal life).
Residential Real Estate: The market value of your personal residence.
Real Estate Investments: The market value of wholly owned investment properties other than your primary residence (commercial properties, timeshares, secondary residences, etc). Take into consideration your portion if you are a partner and calculate your share / ownership interest of the total value
Business/Partnership Market Value: The value of business or partnership interest(s) that you own or partially own.
This would include investments in real estate, mentioned in the preceding comment
Deferred Income: Any income that is received before it is due or before it is earned.
Personal Property (including automobiles): Estimated value of your personal property, if sold today.
Other Assets: List other assets not itemized above, especially Profit-Sharing Plans
A note on stating “book value" vs "market value" - I've seen many borrowers state book value instead of market value. You can be doing yourself a disservice by not stating the estimated market value of the property, which typically - but not always - increases in value.
Liabilities
Next, you want to disclose your liabilities. Liabilities are basically any financial obligations you have - money you owe to creditors - but typically does not include non-recourse debt, which can be disclosed as a non-contingent liability on some templates. Be sure to disclose liabilities that would appear on your credit report.
Notes Payable, both Secured and Unsecured: This includes home equity loans and equity lines of credit, auto loans, student loans etc.
Accounts Payable: Total credit card and other revolving debt
Taxes Payable: Delinquent amount of taxes due.
Mortgage Debt: Outstanding balance of mortgage debt. This includes multifamily and commercial real estate investments for which you are personally liable.
Other Liabilities: Please list other liabilities not itemized above.
Business-related liabilities are not generally included in a personal financial statement unless the person is directly and personally responsible. For example, the individual personally guaranteed a loan for their business. This is similar to cosigning, so this would be included on the personal financial statement.
Now for Net Worth. You've stated all of your assets and disclosed your liabilities. So the Net Worth calculation should be easy. Just deduct liabilities from assets and viola, you have your net worth. If you are using an Excel template, be sure to check all of your formulas!
Schedule of Real Estate Owned (SREO)
Next, let's address your Schedule of Real Estate Owned.
There are many templates available online and many lenders have their own version; but as I've already mentioned, underwriters and all the folks in credit love detail. The more detail that you provide that is both clear and accurate, the faster the process. So let's get started with the major elements of a great SREO.
There are five basic elements of a great SREO:
Property level info
Ownership details
Debt
Cash Flow
Valuation
Property level information will include
The name of the property
Complete address to include street, city, state and zip
Asset Type (MF, SF, Office, Retail, etc)
Number of units or total square feet for CRE
Year Built
Current Physical Occupancy
Year Acquired
Price Paid
Ownership Info
What is your legal ownership role in the asset? Are you a GP, LP …..
What is your ownership interest in percentage? 1%, 5% 50%, 100%? This will be important to determine your share of the total value of the asset
Debt
Name of the current lender
Outstanding loan balance
Maturity Date
Annual or monthly debt service
Is the preceding an interest-only payment or is it amortizing (principal & interest)
Cash Flow
How much is your Effective Gross Income (EGI) (amount you are actually collecting in rent and all other income)
Operating Expenses, including taxes, insurance, management fees
Current NOI: EGI less operating expenses before debt service
Debt Coverage Ratio (DCR) (most templates will have a formula to calculate this)
Valuation
Current Market Value
Cap Rate
Value per unit
Loan-to-Value (LTV)
most templates will have a formula to calculate the preceding three items
Bio
Finally. Let's address your bio / resume. I know, I know. It's too much work and if lenders don't really ask for it, why should you go through the trouble of putting one together? Well, because it can make the difference between an approval and a denial. A higher loan amount vs. less than you asked for. Or maybe even a better rate for those lenders who price based on perceived risk.
Those borrowers who provide one will experience a quicker, smoother approval process when working with a lender for the first time. It also increases the chances of approval when you explain your competencies as an owner-operator.
While it could look similar to a resume, it doesn't have to. A great bio will state your real estate experience in years, units and properties owned, both past and present. State any education you may have with respect to real estate. Discuss any employment you may have had over the years that was directly related to real estate. List the number of properties and units you have owned in the past and that you currently own. State when you started investing in real estate. Elaborate on your roles. Did you oversee heavy renovations? (i.e. implemented a $500,000 capital improvement plan on a 100-unit property; coordinated with contractors). Disclose how you increased occupancy from 80% to 95% within 15 months - "I did this by improving the condition of the property (state what you did), holding management accountable (explain what changed operationally). I delivered a better experience for the tenants and we were able to increase both occupancy, rents and collection by $50,000 over a 15-month period."
Mention any returns - be specific - i.e. purchased the property for $2 million in 2017, invested $500,000 to cure deferred maintenance and improve curb appeal; sold (or valued at) $3 million today based on a x% cap rate.
The more detail and the more specific, the better.
Written by Tony Talamas: Connect with me on LinkedIn
Schedule a time to speak with me here - Tony's Calendar
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