The 5 C’s to Securing Cash
Banks are in the business of making money so it should come as no surprise that lending is at the top of the priority list. Outside of transaction fees and other miscellaneous charges, the main method of making money available to most lenders is the origination and/or servicing of loans. Understanding how and why lenders make loans should be the concern of every short sale investor. Use these 5 C’s to secure cash during an economic boom or bust.
Character – Believe it or not, character still counts when it comes to securing credit. Although the days of personal banking have given way to big business and impersonal internet applications, a substantial character reference is still as valuable as ever. Prior education and experience, quality of references, background and industry experience as well as other character traits can provide the additional incentive to put your application over the edge.
Conditions – Make it clear how the money will be used; for example, to purchase a property, make needed repairs, fund a small business operation or other conditions and contingencies. Demonstrate a steady growth pattern and history of success before moving to bigger and better things. Novice short sale investors will need to be more flexible on conditions when obtaining funding in order to obtain funds but be sure you fully understand all conditions prior to signing. Remember – a significant number of current short sale properties were originally purchased by investors. Don’t add to the swelling ranks of investments gone bad.
Collateral – Collateral is essentially a tangible asset used as security on a loan. In theory, it can consist of nearly anything of value including tangible assets such as other real estate, equipment, business assets, inventory or even future receipts. This is an area frequently overlooked by many short sale investors; for example, rather than simply securing a loan based upon personal assets, consider using future rents or profits as collateral when securing a private loan.
Capital – This is the money you bring to the table in order to secure the deal. Generally speaking the more “skin” you have in the game, the happier lenders are to loan money. The rationale is that people are more motivated to make a property pay off if they have a significant amount to lose along the way. Of course, cash is king but for those that aren’t quite ready to finance the entire purchase out of pocket, providing sufficient capital is one way to sweeten (or save) a deal.
Capacity – This is the most critical factor of all; the ability to repay the loan. Whether you borrow from Aunt Sally or a big institutional bank, everyone wants to know how and when you will repay the money. Be prepared to show cash flow, reserves, repayment schedule and other pertinent information. Remember, banks frequently discount rents by at least 25% in order to address vacancies and maintenance so be sure to build-in a buffer on currently carried properties so they work as assets in your favor when attempting to secure funding for future properties.
Related posts:
- Understanding Mortgage Terms
- Bad loans put Washington banks on ropes (Tri-City Herald)
- Employer-Assisted Housing Forum Helps Make Homeownership More Affordable (Marketwire)
- Employer-Assisted Housing Forum Helps Make Homeownership More Affordable (Marketwire via Yahoo! Finance)
- Mastro bankruptcy trustee won’t be replaced (Seattle Times)
