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How to Get Owner-User Loans For Business And Real Estate

OWNER-USER LOANS ARE AVAILABLE TO all kinds of businesses, including retailers, manufacturers, doctors, restaurants, dealerships, wholesalers, shopping center owners, and service providers.

ALSO CALLED OWNER-OCCUPIED FINANCING, owner-user loans can be used for most business and real estate purposes, such as:

• Acquiring or expanding a business
• Buying, building, improving, and refinancing land and structures
• Purchasing equipment, furniture, inventory and supplies
• Securing working capital
• Repaying existing business and real estate loans

AN ADDITIONAL BENEFIT OF THESE LOANS is that they help a business to respond quickly to changing needs and opportunities such as unexpected large orders, marketing expenses, renovations and improvements, working capital requirements, partner buyouts, increasing cash flow, and new product development.

OWNER-USER LOANS MAY COME FROM traditional banks, credit unions, and private lenders, and they can sometimes come with guaranteed loans from the Small Business Administration (SBA) 7(a) (general business loan) program and 504 (real estate and equipment) program.

BANKS AND OTHER LENDERS LIKE OWNER-USER LOANS because they are low-risk and can be repaid from income the business generates. Additionally, they help the lender form a lasting relationship with the business.

BROKERS LIKE OWNER-USER LOANS because they are relatively simple and easy for eligible borrowers to qualify for.

COMPARED TO OTHER TYPES OF LOANS, owner-user loans often have

• lower interest rates
• higher loan-to-value (LTV) ratios

OWNER-USER FINANCING SHARES SOME FEATURES with hard money loans, but depends more heavily on the business and its owners.

TO PUT AN OWNER-USER DEAL TOGETHER, you need a business that rents more than half of a building's space. Ideally, the business will own the property where it's located. If the business rents out part of the building to someone else, that's even better.

AS WITH ANY BUSINESS OR REAL ESTATE LOAN, the borrower must furnish the lender with personal and business financials, property details, tax returns, a description of the business's products and services, and other standard loan application information.

HERE'S AN EXAMPLE OF ONE LENDER'S owner-user financing offer:

Property Type: Office, Retail, Warehouse,
Light or Heavy Industrial, Mixed Use
Loan Amounts: $500,000 to $100,000,000
Loan-To-Value: Up to 90%
Lending Area: Worldwide
Credit: Mid-FICO
Documentation: Full or Stated Doc
Target Terms: Several Options available, up to 30 year fixed;
Fixed and Variable Rates
Recourse: Full Recourse
Special Notes: SBA 504 and SBA 7a loan programs and Bank Financing available
Close: Fast Closing

ONE BUSINESS SCENARIO that creates an opportunity for an owner-user loan is where a business acquires property to house the business and buys a building larger than it needs.

THE BUSINESS OWNERS CAN THEN LEASE PART OF THE SPACE to third-party tenants to generate additional income. If the business needs to expand at a later date, it can take over the rental space for its own use, or it can use the building and the rental income to help secure an owner-user loan.

ANOTHER ADVANTAGE of owner-user property is that, if problems occur and the business needs to raise money quickly, it can sell all or a portion of the space and, if desired, lease back what it needs for its own use.

EITHER WAY, THE OWNER-USER SETUP makes lenders feel more secure, so they're more likely to make the loan the business seeks.

OBTAINING AN OWNER-USER LOAN usually involves a hybrid approach. It uses the value of the real estate, the rental income, and the finances of the business and its owners.

EACH CASE IS DIFFERENT and presents its own opportunities. Often, the borrower and broker can persuade a lender to make the loan by highlighting the right mix of strengths—whether these strengths reside in the building, the rent, the business or the personal qualities of the business owner. A down payment may be required, particularly if the business is new.

IF THE LENDER LIKES THE PROPERTY WHERE THE BUSINESS is located and the business has money coming in, an owner-user loan can often be arranged.

This article was originally published in the May 2014 issue of Money Watch Bulletin. Subscriptions to Money Watch Bulletin are available in print or downloadable PDF for $95/year (12 issues).

How To Find Or Buy Low-Priced Preforeclosure Real Estate

YOU CAN FIND OR BUY real estate at bargain prices by looking for preforeclosure properties. Preforeclosure is the period of time between when a homeowner has stopped making payments on a property and when the property is sold at auction.

YOU CAN FIND A PREFORECLOSURE HOME at a cheap price for yourself or a client. Then, you can pocket your commission or rent or flip the property for a profit.

THE ADVANTAGES OF PREFORECLOSURE REAL ESTATE ARE:

1. Preforeclosures are cheaper that regular foreclosure properties.
2. During the preforeclosure period, you can visit and examine the property. At a foreclosure auction, this isn't possible.
3. With a preforeclosure, you deal directly with the owner/seller, soon after they've received a foreclosure notice from the lender, city or state.
4. Negotiating with a seller is easier and less competitive than bidding against professionals at a foreclosure auction, and it's simpler than dealing with a lender.
5. Owners wanting to sell a home during preforeclosure are motivated to sell.
6. You or your client can rent the home to the owner after taking it over and sell the house back to the owner or to another buyer for a profit at a later date.
7. You don't need to pay huge amounts of cash upfront like at an auction.

YOU FIND PREFORECLOSURE LISTINGS by taking these easy steps:

1. Call your city recorder’s or clerk’s office to learn which agency handles foreclosures. Foreclosure data from lenders is freely available public data.
2. Contact the agency and ask to be put on their free information list.
3. Read the information on foreclosure procedures for your area. Public records may include a Notice of Default (NOD) from a lender, telling the owner the house will go to auction if payments aren't made. This is when the preforeclosure period begins.
4. Get to know the preforeclosure period and how long the owner has before he or she must sell. Owners are more motivated to sell cheaply during preforeclosure.
5. Get to know the "redemption period"--the time the home owner has to buy back the home after it goes to a foreclosure sale. Look for the shortest redemption time possible. Some areas have zero redemption time; others as long as a year.
6. Before you or your client makes an offer on a preforeclosure property, be sure to inspect it and have a competent real estate attorney review the offer.
7. Consider using a sale-leaseback deal to allow the seller to remain in the house. An attorney can write it for you. With a sale-leaseback, you or your client owns the property and receive regular rent payments from the seller.

IN ADDITION TO THE PUBLIC RECORDS OF FORECLOSURE LISTINGS mentioned above, you can find NODs and preforeclosure notices in local newspapers, where lenders are required to publish this information. 

Check out HUD Homes at www.hudhomestore.com. Other sources include the real estate listing services and websites like zillow.com, trulia.com, homesearch.com, realtytrac.com, and realtystore.com. Also be sure to check your area's business and real estate journals and magazines.

RESOURCES:

Real Estate Books and Self-Study Courses from International Wealth Success, Inc.

Using A Compensating Balance To Get A Loan

TO BORROW MONEY EFFECTIVELY, loan brokers, finders, consultants, and potential borrowers need to understand as many different methods as possible to increase the likelihood that a lender will make a desired loan.

FOR EVERY LOAN REQUEST, the lender weighs many variables, such as type of loan, amount, interest rates, repayment terms, borrower's collateral, job status, earnings, credit score, credit history and other factors. To be an effective loan finder or borrower, you need to know how to use this information to secure the funds you, or your client, need.

THE COMPENSATING BALANCE LOAN

ONE METHOD THAT CAN HELP YOU, OR YOUR CLIENT, get a loan is by using a “compensating balance.” This is an amount of money that a borrower agrees to keep in an account with the lender as a condition for getting the loan. Such loans are most often made to businesses, although they may be provided for real estate as well.

THE ACCOUNT CONTAINING THE COMPENSATING BALANCE usually does not bear interest to the borrower, and the lender is free to use the money as it wants. If the borrower fails to repay the loan as agreed, the bank can take the funds from the account.

A SIMPLE EXAMPLE

COMPENSATING BALANCES ARE TYPICALLY 10%-20% of the amount of the loan.

A SIMPLE EXAMPLE OF THIS METHOD would be where a lender agrees to make a $100,000 loan as long as the borrower keeps a deposit balance of at least $10,000 (10% of the loan) in a savings, checking or certificate of deposit (CD) account. The $10,000 is called the compensating balance.

HOW IT WORKS

IT'S NOT UNCOMMON FOR LENDERS to subtract the interest and the compensating balance amount from the total principal of a compensating balance loan. For example, on a $25,000 loan at 8 percent interest for one year, the interest of $2,000 (8% of the loan) and the compensating balance amount of $2,500 (10%) may be subtracted from the $25,000 principal. Thus, the total amount the borrower receives is $20,500. This is only a general example. Individual lenders and specific loans may vary.

SOME LENDERS PREFER TO OFFER A LINE OF CREDIT rather than a regular loan when a compensating balance is used.

DESCRIBING THE LOAN

THE NAME “COMPENSATING BALANCE” HASN'T CAUGHT ON with all lenders, even though you'll find it in financial texts like the Dictionary of Banking Terms and Dictionary of Business Terms. “Offsetting balance” is another name that is sometimes used.

GENERALLY, LENDERS WILL UNDERSTAND what you're looking for when you describe the method—“an amount of money the borrower agrees to keep in an account as a condition for getting the loan.”

WHEN APPROACHING LENDERS about this kind of loan, be prepared to describe the method and explain the type of arrangement you want. Give an example like the one above if you need to.

SHOP AROUND

AS WITH ANY LOAN, IT'S WISEST TO SHOP AROUND at many different lenders. If one lender turns down a request for a compensating balance loan, the next one might make the loan that you, or your client, need.

TO GET THIS TYPE OF LOAN, YOUR BEST BET is to go to commercial banks or credit unions. A list of commercial banks can be obtained from the Federal Deposit Insurance Corporation (FDIC) at fdic.gov. A list of credit unions can be obtained from the National Credit Union Administration (NCUA) at ncua.gov.

TIPS FOR GETTING A COMPENSATING BALANCE LOAN

1. The larger the compensating balance in the borrower's account, the easier it may be to get a compensating balance loan.
2. To set up a compensating balance loan, the borrower should establish a deposit account with the lender where the loan is requested.
3. Some lenders may offer a line of credit instead of a regular term loan. Borrowers should consider taking a line of credit, as it can be just as useful as a regular loan.
4. Be prepared to describe the method and give the lender an example of the type of loan you have in mind, since the lender might not use the term “compensating balance.”
5. It may be easier to get a compensating balance loan from a commercial bank or credit union than from other lenders, so these are good places to start. A list of commercial banks can be obtained from fdic.gov and a list of credit unions from ncua.gov.
6. Look to large lenders and lenders with locations in your area.
7. Shop around at different lenders. If one turns down your request, move on to the next.
8. Keep the lender happy. The borrower should keep the full amount of the compensating balance in the account at all times. It may be helpful to keep more than this amount in the account, if possible.
9. For the best chance at obtaining a compensating balance loan, apply for the loan through an existing business, rather than as an individual.

IF THE BORROWER CAN MAINTAIN THE AGREED-UPON COMPENSATING BALANCE amount, a compensating balance loan can be a useful tool to help fund a growing business or real estate endeavor. 

For additional money-making tips and products, visit my official International Wealth Success website and browse our real estate and financing pages.

11 Ways to Turn Negative Cash Flow Real Estate Into Positive

SOME INVESTORS BUYING REAL ESTATE TODAY find that many properties they look at have a Negative Cash Flow (NCF). This means you have to pay out more money than comes in. For example, a multifamily apartment house with a monthly income of $10,000 and expenses of $10,500 has a $500/month NCF.

TO MAKE THIS BUILDING PROFITABLE, you'd have to (a) reduce your monthly expenses by $500 or more, or (b) increase your monthly income by $500 or more. You can do this in multiple ways. Here are 11 actions you can take:

1. Raise the rent for each apartment in your building. Doing so will increase your income, help to pay your expenses, and reduce your NCF to zero. Figure how much you'll have raise each rent to increase your monthly income by $500.

2. Increase the rent for new tenants. It's easier to get a higher rent BEFORE new tenants move in than after.

3. Reduce your monthly mortgage payment by getting the term of your loan extended from 15 years to 25 or 30 years. This will reduce your monthly mortgage payments, lowering your expenses to wipe out your NCF.

4. Negotiate a lower interest rate on the first mortgage to reduce your monthly costs. Thus, reducing the interest rate by 1% on a $300,000 first mortgage will save you $300 per month in interest costs.

5. Convert your first mortgage loan to an interest-only loan. This will again reduce your monthly payment. You'll repay the principal in the form of a "balloon" at the end of the loan term or when you sell the property.

6. Have the real estate taxes reduced or temporarily suspended. Do this by visiting the local tax board and presenting your case to them. Contact your county or city government for help. The worst they can say is no.

7. Reduce your operating expenses by cutting costs. For example, get a part-time manager instead of a full-time one or collect the rents yourself instead of paying a management firm. Look for additional operating expenses you might be able to reduce, such as advertising, cleaning, landscaping, supplies, telephone, trash, etc.

8. Get your tenants to pay for utilities such as heating, water, electric or gas. This will save you big bucks and reduce your NCF.

9. Make two, or more, income units from one. This can nearly double your income from the area occupied by one unit.

10. Consider charging parking fees. These fees are not uncommon nowadays.

11. Increase your security charge from 1 month to 2 or 3 months. This will give you more cash and higher interest earnings on it.

For more real estate tips and methods, visit the International Wealth Success Website.

Everything You Wanted to Know About Collateral

COLLATERAL CAN BE A KEY FACTOR in determining a borrower's ability to get a loan. Although it's not the only factor that a lender will consider, collateral is a concept that every borrower, broker, Finder and consultant must understand in order to obtain loans successfully.

WHAT IS COLLATERAL? Collateral is a form of security for a loan. When a borrower pledges collateral as security for a loan, it reduces or eliminates problems the lender might face if the borrower cannot, or does not, repay the loan as they originally agreed to do. A borrower who doesn't repay a loan as promised is in default.

IF THE BORROWER DEFAULTS, the lender can take the collateral and sell it to get back some or all of the money the borrower owes. Because securing the loan with collateral lowers the lender's risk, the lender may be more likely to make the loan.

COLLATERAL CAN HELP A BORROWER get a loan even if the borrower has a less-than-perfect credit score or a limited credit history. Additionally, a loan secured by collateral may come with:

• lower interest rates
• fewer transaction fees
• better terms
• more favorable repayment periods

COLLATERAL MAY BE COMBINED with other forms of security, such as cash in a savings account or money owed to a business, to show the lender that the borrower has additional ways to repay the loan.

COMMON FORMS OF COLLATERAL INCLUDE:

• land
• homes
• buildings
• vehicles

ADDITIONAL ASSETS THAT CAN SERVE AS COLLATERAL ARE:

• equipment
• jewelry
• stocks and bonds
• business inventory (materials and products)
• accounts receivable

ASSETS MAY BE OWNED BY an individual (personal collateral) or by a business (business collateral).

FOR COLLATERAL TO BE ACCEPTED BY A LENDER, the borrower must have some form of proof (typically called a title) which shows the lender that the borrower owns all or part of the collateral. Thus, collateral may be based on paper assets, often referred to as notes.

PROOF OF OWNERSHIP CAN INCLUDE items such as:

• a Certificate of Title to a building
• a Deed to a piece of land
• stocks in the owner's name
• a receipt showing the borrower “has title” to the asset being pledged as collateral

COLLATERAL CAN ALSO BE BASED ON EXPECTED ASSETS, as in the case of an investment or accounts receivable (money that is owed to a business).

ASSETS FINANCED WITH BORROWED FUNDS can sometimes be used as collateral. For example:

• a property that a borrower wants to buy may itself serve as collateral,
• because the lender can repossess and sell the property if the borrower defaults
• similarly, a building or piece of land may generate income for the borrower
• a loan based on this kind of real estate is often called a hard money loan

IF A BORROWER ALREADY HAS A MORTGAGE on an existing property or a loan on a vehicle, the lender might accept these assets as collateral, but the total value of the collateral may depend on how much of the original loan has been paid (called equity). It's also possible that a borrower might own only a portion of the collateral together with another person or business. This introduces added complexities.

BORROWERS, BROKERS, FINDERS AND CONSULTANTS SHOULD BE AWARE that the borrower risks losing the collateral if they fail to repay the loan, so it's important to carefully review the risks of using certain assets as collateral before pledging them to the lender.

IF THE BORROWER CAN'T AFFORD TO LOSE THE COLLATERAL, such as his home, he should think twice before pledging the asset as collateral. Why? Because if the borrower defaults, he could wind up losing not only the existing property being used as collateral, but also any new property he hopes to buy with the loan that the collateral is meant to secure.

LENDERS TYPICALLY APPRAISE THE COLLATERAL to decide how much they think it's worth. Borrowers should realize that lenders may appraise an asset at a value lower than the borrower expects or believes the asset is worth. It's also possible that the lender's appraisal will be lower than the value set by the city or county for the purpose of collecting taxes on the property.

IF THE BORROWER DISAGREES with the lender's appraisal, she has two options:

1. seek a loan from a different lender or
2. appeal the lender's appraisal and ask for an appraisal review (reappraisal)

IN SOME CASES A LENDER WILL REAPPRAISE THE PROPERTY at a higher value. If the appraisal is too low, the borrower might be able to talk the lender into offering a lower interest rate or adjusting some other aspect of the loan to make it more attractive to the borrower.

COLLATERAL CAN DECREASE IN VALUE due to any number of factors, such as:

• deterioration of the property over time or
• fewer people wanting to move to the area where the property is located

IN OTHER CASES, THE VALUE OF COLLATERAL CAN GO UP, as with investments that earn money over time.

IF THE COLLATERAL DECREASES IN VALUE and the borrower defaults on the loan, the borrower may still have to repay the amount at which the collateral was appraised. For example, a home might initially be appraised at $100,000 and then decrease in value to $75,000 a few years later.

IF THE HOUSE WAS USED AS COLLATERAL to get a $100,000 loan, the borrower must still pay back the $100,000, even if the house is now worth $75,000. If the lender sells the house for $75,000, the borrower owes the lender $25,000. This can put the borrower in hot water if he or she doesn't have the $25,000.

IT'S USUALLY WISE TO BORROW LESS than the full value of the collateral to avoid the problem just described. If the amount of the loan is less than the value of the collateral, the borrower and lender are better protected and the risk of losing money is lower for them both. This makes it easier for the lender to make the loan.

IF A BORROWER HAS MADE PAYMENTS ON A PROPERTY reliably over a period of time—usually for at least a year—the collateral is said to be seasoned. Lenders prefer seasoned collateral because it further helps to assure them that they'll get back the money they loaned out.

A LENDER WON'T NECESSARILY REFUSE TO MAKE A LOAN just because a borrower lacks collateral. If the borrower has money in the bank, a history of paying bills on time or is willing to accept a higher interest rate on the loan, the borrower might still have a chance of getting the loan they want.

BEFORE GOING TO A LENDER FOR A LOAN, make a list of all the borrower's assets that might be offered as collateral. Carefully assess the value of each item. Look up the value given in sources such as the city's tax assessment and on real estate websites, the “Blue Book” value (for vehicles), and the ticker tape price and earnings (for stocks and bonds).

THESE ARE JUST A FEW OF THE MANY POSSIBLE KINDS of collateral and the ways of judging their value. With a good knowledge of all the assets that the borrower might be able to pledge as collateral, the borrower and his agent can approach lenders with confidence while increasing the chances of getting the loan that the borrower seeks.

The article was previously published in Money Watch Bulletin.

For more real estate tips and methods, visit the International Wealth Success Official Website.