The Flawed Thinking of a “Wannabe” Investor

OstrichI received this email today and thought this would be a good opportunity to discuss the flawed thinking of a newbie borrower. Here it is.

“Carmen, I would love for you to do a commercial loan, but you need to match the following criteria.
*** commercial building valued at 225,000
*** loan amount: 150,000
*** terms 20/25 years
*** interest rate at 4.5
*** origination fee is less than 1%
*** no prepayment penalty
*** Then I need to do a credit check on the company that carries the note.”

So, let’s start dissecting it to see what’s wrong. I’m told it’s a commercial building but I have no idea what type is it, what’s the occupancy rate, its condition, its location, and whether this is a purchase or a refinance. I’ll assume it’s a potential purchase; if it was a refinance she’d most likely already have experience from securing the originating loan.

The requested loan to value is not bad, 67%, but the loan amount is very small. Most lenders are not attracted by low loan amounts because they can’t make any money. Furthermore she’s requesting no prepayment penalty which tells me no lender will be eager to give her a loan.

Lenders are not philanthropists, they’re strictly looking to make returns on their money. The returns would be commensurate with the level of risk they accept. High risk is rewarded with higher rates of returns while low risk comes with a higher level of comfort and lower returns. In her case, I have no knowledge of her personal financial strength nor of the property’s ability to service its debt. Yet, I will assume she lacks knowledge and experience in the field.

Finally she provided nothing about herself or the property but she demands her right to do a credit check on the lender.  It looks more like she’s doing the lender a big favor by giving it the opportunity to finance her project. Therefore the lender should be grateful to lend its money at such low rate of return on a property and borrower that it knows nothing about.

I can’t help giggling when I get an mail like this. I’m told that if I could match these terms I’d be the lucky one to do the loan. If she got an offer on these terms why isn’t she moving forward? Why give me the opportunity to match something she supposedly has already been offered?

Under normal circumstances a lender would not even reply to such a request. The competition for money is fierce. The best qualified borrowers and properties win. Her loan request stands no chance to be approved, not on her terms, and not before she provides evidence of her strong financial worthiness and the property’s track record.

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