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Property Investment Loans and the Luxury Home Market Still Suffering

Both the luxury homes and the investment property market are still feeling the pinch of the credit crisis, with loans hard to come by and substantial excess inventory. The process of arranging loans to buy property has been drastically affected since the Lehman Brothers crash, and most lenders have increased their lending criteria by a substantial margin.

It is unlikely that a borrower will be able to arrange financing without at least a 25% deposit available. When one takes into consideration the increases in charges and fees to arrange a loan, realistically this needs to be closer to 30%. Until such times as the commercial property losses accrued and coming due over the next 18 months have been declared, lending is going to remain restricted and the markets will continue to devalue.

Some markets may recover sooner than others, but the problem of overbuilding – particularly in the “luxury” segment is likely to continue to cause a problem for some time. With the end of the 125% “jumbo loans,” and a return to rational lending, one has to wonder how much of the current inventory is going to be unsalable.

It is hard to accurately predict where the turn around point will be – and there will be one, but many are calling that point and have been calling it almost since the downturn began. But – I feel this problem is still unresolved and this one is too big to “hype,” our way out of. The underlying fundamentals: lack of credit, upcoming banking losses in the commercial property sector, and rising unemployment have not changed.

How to Protect Yourself When Getting a Loan

There are many ways to protect yourself if you are seeking a commercial loan or a refinance loan.

First, do some research online about both a commercial loan and a refinance loan. Find out your mortgage options, and also check and copy your credit report so you will be more prepared to negotiate for your commercial or refinance loans.

You should interview several lending company’s and keep a journal of what terms they are offering for a new commercial loan or a refinance loan.

Always price the other property in the area, the price should be comparable. Hire a licensed qualified home inspector, and before you sign the contract on either a commercial or refinance loan, decide who will be responsible for any repairs, the buyer, or the seller.

Never lie on the loan application for any reason. Lying on a commercial or a refinance loan application is fraud and is a criminal offense.

Never borrow more money than you can afford to pay back, or that will make your payments larger than necessary. You do not want to end up losing your property, and the equity in it.

When taking out a commercial loan, or a refinance loan, never sign a blank document. If while reading the contract, you put a cross through the blank spaces, someone cannot add information after you sign. You will be liable for any surprises they might add.

Do not sign anything you do not understand. Take your contract to a real estate professional or an attorney skilled in commercial or refinance loans.

Always, if buying a government home, state honestly your intention to occupy the home, or if you plan to fix it up to rent or resell. Your commercial loan may be turned down if they find you have not been truthful.

Some people get refinance loans to get a lower finance rate, and often borrow more money against the equity in their home. Some lenders may make this sound too good to seem possible. If so, it generally has some kind of catch.

Make sure a refinance loan to pay off bills or for home improvement is the best plan for you, and do not let yourself be talked into something you do not want to do. Some lending companies offer a very low financing option, only for you to learn later that there is a large balloon payment due at the end of the loan. They sometimes also add more finance, but put it into your payment to fool you.

Remember, there are many good, honest lenders that can help you with a commercial loan or a refinance loan. There are also dishonest people who will try to undermine you and trick you into financing more money than what you have planned. Stick to your original budget, and do not sign a contract if it is not exactly what was presented to you. This is a business where the representatives are paid by commission, so make sure you are trusting of this person. Asking friends or the Better Business Bureau is a good place to reference lending companies if they have had bad marks, or are considered a good business you can trust.

Commercial Loans and Business Plans Considered

It’s not easy to write a business plan, but it is paramount that entrepreneurs do so. For instance, consider if you will the type of folks who are entrepreneurs – gregarious types of individuals, who are probably not very good with the fine details as accountants are. Therefore, they often have trouble preparing business plans. Nevertheless they need to do this so they understand what they’re getting themselves into, and evaluate their potential business opportunities appropriately without allowing their optimism to run away with the game.

Over the years, since retirement, I have helped various entrepreneurs in their businesses, and often they need to get funding or financing to start these endeavors, so they go and look to get a commercial loan. The bankers know that entrepreneurs aren’t very good at writing business per-startup plans, so generally they except business plans which are half baked, or in the case of the small business administration, they have a form which is filled out by the entrepreneur in place of the business plan, it’s about 13 pages.

However, a decent start-up plan could easily run 40 pages including the proformas in the back. It seems to me rather than making it easy for entrepreneurs to get commercial loans and therefore requiring less than adequate business plans – that we should be moving in the other direction, stipulating that the business plans the very well done. Indeed as a taxpayer I am concerned that my tax dollar will subsidize the SBA loan program. And many of these loans fail, but right now the taxpayer and SBA guarantees 90% of the loan with the local banks which make the SBA loans.

Since the bank has very little risk because the government is guaranteeing 90% therefore they are only on the hook for 10%. Are you beginning to see the problem with this? If entrepreneurs and small business people can’t prepare start-up plans, and they aren’t sure what they’re getting themselves into, why an Earth is the SBA and commercial business banks providing more rope for these future business owners to hang themselves with? Indeed that makes no sense at all does it?

Perhaps, this is why I often tell entrepreneurs to create a business startup plan, then look at the real numbers, and play devil’s advocate a little bit against their overbearing opportunistic enthusiasm and hyper drive optimism. Indeed, I hope you will please consider all this and think on it. If you have any questions, comments, concerns, or even case studies, I would be glad to hear about it. Please shoot me an e-mail.