Think of phrases that never portend anything good: “Oh, a letter from the IRS,” or “We forgot to cook your pork chop.” Among those is, “I have to check on the status with the bank.” When you’ve applied for a loan, you sit wondering and waiting what the bank is going to say. This can take weeks and can leave you feeling helpless and unsure. This is doubly frustrating when you have an opportunity to buy a great distressed property or a house to fix and flip, or some other investment on which you have to move quickly. Unfortunately, banks take a long time, and too often they reject loan applications from borrowers who could do great things with the financing if they were only given the chance.
Banks have their own rules, filtered through decades of bureaucracy. They are very risk-averse and have very strict and unyielding standards.They aren’t programmed to understand you, just the numbers behind you. It can be extremely frustrating, but if you know the limitations going in, you can find an alternative source of financing that will understand not just your needs, but also your vision. Here are a few reasons why a bank or a traditional lender might reject your loan application… and why you may want to consider equity-based financing as a better option.
You Overextended to Buy the House
You’re a real estate investor whether you have one property to fix-and-flip or you have a dozen. You may have several projects going at once, or perhaps you saw an opportunity you just couldn’t pass up and took it. However, now that you have the property, you need the capital to finish the job and you may be out of money. This can be expensive if you intend to do it right. However, when you apply for a loan from a bank, they might see that you’ve used up your credit to buy the house. While “spend money to make money” is something agreed upon by everyone, banks too often don’t take that to heart. They just see someone who has spent what they have, and then they politely shoo you out the door.
You Have a History of Bad Credit
A smart lender understands that the market is tricky, and even the best investors lose almost as much as they win (they just understand how to minimize the damage). But if you have a few missteps in your history, then you could be rejected by the bank moving forward, leaving you unable to buy that key piece of property that could turn things around. It’s possible to get a loan with bad credit, but almost never from a bank. For that, you need someone who understands the market.
You Have a History of Bankruptcy
Did you know that Donald Trump has filed for corporate bankruptcy multiple times? It happens a lot in real estate investing, no matter what level you’re playing at. When you don’t have his kind of cash, though, having a bankruptcy filing in your history can be a huge hindrance when you need to get a loan moving forward. Banks essentially penalize you for taking risks in the past. The only thing you can do before the banks change their minds is wait and slowly build back your credit. Of course, you rarely have time to wait, as waiting can cause you to lose out on great real estate opportunities.
Your Project Doesn’t Fit Their Scope
Banks have regulations from the top down. Some banks don’t like fix-and-flip projects. Others only like them at a certain income level or in a certain neighborhood. Many want to dictate what the project can be, or else it is a no-go. If every box isn’t checked off, your application is rejected. It is ok to work and to compromise, but you can’t suddenly make a house move to a different location. There are some obstacles that are simply impossible to overcome.
They Don’t Understand Your Vision
This is the worst one. On a personal level, most bankers and lending officers are good and sympathetic people who get what you’re trying to achieve. But for the most part, they aren’t allowed to have much institutional imagination. They don’t see that you’re a hard worker who knows how to turn a piece of property into a desirable home. They don’t understand that you’ve done the research and know the neighborhood is changing. They are looking at numbers and not the plan as a whole.
That’s what separates them from the best hard money lenders in California. Lenders like Socotra are far more interested in the viability of the project than they are in anything else, and that starts with you. If you have a good plan, and can prove that your plan can work, it’s possible to get a quickly approved loan and get to work. Banks are great at shutting doors. Hard money loans help you build a new door altogether.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.