Every seasoned real estate developer knows one thing; the ability to raise money is the key to success in this business. In fact, even those investors with less development experience, but has the right team, and perhaps a family member with deep pockets can do quite well as a real estate investor. However, let's say you don't necessarily have the network or the track record to raise funds. Where do you turn, and if you go to the bank, how do you maximize funds for your project so you don't end up with a 50% completed project in foreclosure?
In this article, we are going to cover 8 key topics that you can use to maximize your ability to raise more money from your development loan. We will specifically cover what you should look out for when approaching a lender, and the importance of covering these items. If you do this right, there are instances where you could fund 100% of the money needed for development and construction of your project.
The following will outline what must be covered in order to obtain the highest possible loan.
1. Research Lenders & Find Out What Is Their Favorite Type Of Project?
This may seem common sense, but every human being on this planet has likes and dislikes. And the same principle applies to the likes and dislikes of what a lender wants to fund. Some banks lend just on residential, while others only focus on commercial
, or even specializing in bridge loans. When you find a lender who likes your type of project, your odds of increasing the loan amount is dramatically expanded.
2. Always Have Solid Numbers
You've heard the saying, measure twice and cut one. Well, we have to say that in the real estate development world, knowing your numbers down to the last nail gets you very far indeed. Don't just take someone's word for what you can collect in rents. Or certainly, don't take the national average concrete costs and throw it into your feasibility study. A lender wants to know that you have thought out everything, and how you show them this is with real data backed up by solid research and strong numbers.
3. Wait On Asking For Funds
One of the biggest hurdles in real estate development is funds. And it's very easy to put the cart before the horse when asking for money from a lender. If you ask too soon, a bank will ask for a feasibility study. It's best to do your homework first before asking for money. It's completely acceptable to reach out to your target lender and develop a professional relationship, but before you ask for them to get involved in your project, be serious with your approach.
4. Tie Up The Property First
At Equity Legal
, we almost always structure our own deals where we can tie up the property at an agreed upon price and an option clause. This way we can tie up the property on our projected terms while allowing us greater time and flexibility in securing additional funds or getting plans approved. A lender is more positive to a deal that is tied up with fixed terms that they can handle as opposed to just an idea to purchase a particular property.
5. Leave Your Lack Of Experience Out Of The Deal
Your absolute priority is on the deal. Not on you. Focus on the numbers, the research, and the solid returns that your development project will produce. A good deal is a good deal, so don't get discouraged.
6. Always Ask For More
A lender will always offer you less than you ask for. In fact, should you ask for $1,000,000 and the bank gives you 80% of this value, you most likely then would have to explain yourself as to why you would accept a lesser amount. The last thing you want is to have another feasibility study completed at this amount. It's always best to ask for more in any development project.
7. Have The Guts When The Time Comes
Having plenty of bravado when asking for funds is very important. Be firm, and believe in your project. Don't however try and cover up lack of experience or have weak numbers. Do your homework and act with utter belief in your deal.
8. If You Have To, Offer Incentives To Your Lender
A lender is more apt to lend 100% of the deal if they can also participate in the upside. However, we would advise that you consult an attorney before structuring something like this. Just know, the bank has seen all the tricks and controls your deal through the loan. This is one of the reasons we structured our firm in such a way that combines real estate law and real estate brokerage