Victor’s Insider Secrets of Dealing with Your Apartment’s Lender
August 15th, 2012 | top of page
In today’s real estate market it’s not uncommon for an apartment owner to be faced with the problem of not being fully able to meet their obligations to their lender.
Perhaps your loan is coming due and, in today’s real estate financing climate, there’s no way to secure a new loan to replace the maturing loan. Or perhaps, no matter what you do, the income just isn’t enough to make the monthly payments as they are now structured and pay all the ongoing operating expenses of your property.
Whatever your problem may be you need to be prepared to know how to get the upper hand with your lender when working out your apartment loan.
In this report I’ll share with you three of my most clever tactics to get your lender off your back and working with you instead of against you in dealing with your apartment.
Tactic #1 — BE PREPARED
When faced with any adverse situation it’s always a good idea to employ “The 7 Ps” — Proper Planning and Preparation Prevents Piss Poor Performance. You must be PREPARED to deal with your lender.
A loan restructuring or workout can be long, tedious and often complex. It’s emotionally stressful while you’re fighting your creditors to also be faced with holding your property together often with little cash reserves.
Large companies often have management teams to oversee their debt restructuring while other employees are assigned the task of maintaining operations. For an apartment owner such as yourself its usually just you wearing all the hats—the buck stops with you.
This often puts you in a David & Goliath situation—you being David, the small struggling apartment owner, against Goliath, the large nameless, faceless, giant financial institution, that’s preparing to crush you.
But, as we all know, in the end David can and does come out the winner. Being prepared for battle with your lender allows you to come out the winner.
But what does being prepared really mean in the context of getting your lender off your back and working with you instead of against you?
There are 4 key things you need to do in order to be prepared to begin this process:
- Have a REALISTIC assessment of your situation
- Have your financial records in shape
- Make sure you have an accurate understanding and knowledge of what your property is worth in today’s real estate market, and
- Have a clear understanding of what lender liability issues might exist regarding your loan so that the lender fully understands their exposure
A Realistic Assessment
In order to be prepared to even begin discussions with you lender, you have to understand better than anyone else what exactly is going on with your property. You must know the ins and outs of your property. What are its strengths and weaknesses? You must know all there is to know about the property and be able to demonstrate to the lender that you are the #1 expert regarding YOUR property.
Remember, this is NOT the time to be delusional. This is the time to be realistic and assess your property accurately. This is the time to demonstrate that when the lender underwrote the property and approved your loan, you were the right person to put in charge and you are still the person who knows this property the best.
Get Your Financial Records In Shape
Now is not the time to reveal that your finances are operated out of a shoebox and you have no idea of which vendors you owe money to and which tenants owe you money. Now’s the time to demonstrate that you have an accurate and timely accounting system that looks professional and accurately communicates the financial status of your apartment complex to you and your lender.
If the lender can’t understand where your property is financially and how it is operating, how can it begin to assess whether or not they can accept your restructuring or workout plan?
Lenders deal with numbers and if you can’t convince them that you’re on top of your numbers, know what they mean, and have the ability to accurately and timely report to them, they’ll quickly lose confidence in you.
Accurate Knowledge of What Your Property is Worth In Today’s Real Estate Market
A key aspect of any restructuring or workout situation is an accurate knowledge of what your property is worth in today’s real estate market.
Too often out of state lenders rely on hastily prepared BPOs (Broker Price Opinions) prepared for them by opportunistic real estate brokers looking to secure a listing from the lender should the lender take the property back. These BPOs are often inflated and don’t represent the true value of your property today.
In order to “Make Your Case to Your Lender” you must have accurate facts about your property’s worth backed up by actual comparable transactions for like–kind properties to yours. You must be able to demonstrate to your lender you know your market and know what the true value of your property is.
Lender Liability Issues
Although they say they don’t, lenders do make mistakes and there are multiple ways in which lenders can have defects in their loan documents or procedures they’ve used in dealing with you and your loan. In many cases these errors or defects can work in your favor and convince the lender that they’re better off working with you than against you.
Now don’t think that these defects or errors will allow you to make the loan disappear. Often, these are errors or defects are of a technical nature that will bring the lender to the negotiating table, making them an ally rather than an adversary.
An accurate assessment of what, if any, lender liability issues exist is a powerful tool for you to have when negotiating with your lender.
Tactic #2 — Become Part of the Solution; Don’t Be the Problem
Most debt restructuring or loan workout plans center around 1 or more of these strategies:
- Extend your loan maturity date or amortization schedule
- Deferring principal repayments for a period of time
- Reducing the interest rate on the loan
- Reducing the debt servicing payment
- Suspending debt servicing payments for a period of time
- Reducing principal amount of loan
Many lenders’ asset managers are overworked, bogged down in paper on their desk and don’t have the time to effectively analyze what is in your (and their) best interest regarding the loan on your property. Lenders tend to be conservative people, not creative, and are not inclined to stick their necks out on behalf of a client. It’s often easier for them to not buck the system and not come up with creative ideas to save the loan. Often the easier path is following the documents and, if the loan is not being paid, move toward receivership and/or foreclosure.
It is up to YOU to be your own best advocate in this situation. It is up to YOU to come up with a REALISTIC workout proposal and business plan that’s well documented, well thought out and, above all, achievable. You need to create a plan that maximizes your chances of success.
Successful plans are ones that consider what are the biggest objections your lender may have to your proposal and address them in the plan so their questions are answered before they’re asked. Successful plans also point out what’s going to be different in the future vs. what’s happening now.
If your lender feels your property suffers from lack of sufficient management expertise perhaps your plan should propose bringing in a new management company with better credentials. If your lender feels your property needs a cash infusion for capital improvements in order to increase rents and improve cash flow, perhaps your plan should propose bringing in an equity partner.
Now is the time to “Check Your Ego at the Door”. If your goal is to work something out on your property, now is the time to be realistic, practical and propose something that your lender can use to take back to the committee and go to bat for you. Help your lender help you.
Often times your contact point is a middle management “asset manager” who has to put the package together for a committee to approve or disapprove. Provide your asset manager with the maximum amount of ammunition and thoughtful detail and analysis so his job is easier.
The best deals happen when each party negotiates in good faith and understands the other party’s interests and options. Don’t be a thorn in the lender’s side. Be upfront and proactive: provide them with the needed data in a timely manner to make it easier for them to respond to your proposals. Don’t hide and be the rabbit that they have to chase around constantly. Be on the offense as opposed to being on defense. This will help you to better control the negotiations.
Tactic #3 — Get Professional Help: A Man Who Represents Himself Has a Fool for a Client!
There are big issues at play here and now is not the time to be the Lone Ranger. Engage competent, experienced third party advisor(s) to spearhead the negotiations and work closely with you on the analysis and preparation of your strategy. This can often make the difference between success and failure.
Ideally, professional help should include:
An Attorney who is experienced in dealing with lenders and lender liability issues and is able to review a situation and know when any of the following issues have occurred on the part of the lender:
- Breach of contract
- Breach of duty of good faith and fair dealing
- Breach of duty to act reasonably
- Breach of fiduciary duty
- Interference in operations
- Excess or undue control issues
- Communications errors that can turn non-binding and preliminary discussions into promises or commitments
- Defamation of third parties
A CPA who is experienced in apartment operations and financial management as well as putting together business plans and cash flow projections for lenders that are concise, understandable, and presented in a manner in which lenders are used to seeing.
A Real Estate Professional. Not all real estate professional are created alike. To deal with lenders, you need a real estate professional who has significant experience and in–depth knowledge of your property’s local marketplace and asset class. You need to utilize someone who knows apartments, understands apartments, and knows what is happening right now in the apartment market.
Dedicated To Multiplying Your Income
Praedium Advisors and its affiliate, Strategic Apartment Solutions, can provide you with the expertise and knowledge you need to deal with your lender. For more information or to set up a FREE, no obligation consultation, contact Victor Allison at 602 320.6200 or email@example.com