Despite widespread gloom and doom talk in real estate circles, we have witnessed a recent shift in the attitudes of people involved in real estate. We’re reaching capitulation (see The Cycle of Real Estate Emotions).
What does that mean? Well, we’re far from out of the woods—in fact, the worst may be yet to come (see, again, The Cycle)—but stakeholders are finally reaching out to each other to try to find a way out. Rationality is returning.
As we stand together in the middle of the woods, stakeholders are all nursing wounds inflicted by that bear, the economy, and we want to find the quickest path out. Unlike borrowers, though, banks are still being pestered by those bees, their regulators. Banks want to escape the bees also.
Fundamentally, it’s the borrower who holds the tools for getting himself and the bank out of the woods. Borrower, you have the map. You have a compass. And you have bee-repellant to relieve the banks.
Your map is your financial statements. They show both you and the bank where you are. Lax underwriting over the past few years has left most banks’ loan files incomplete. Now, regulators are pressing banks to complete them—all at once—and banks are overwhelmed. Therefore, compile complete, reliable information on yourself and your real estate, and provide it in a format that is detailed, yet understandable. You can’t move forward until all stakeholders recognize where they are.
As a borrower, don’t hide anything when preparing personal financial information. Honesty still is the best policy. Banks are not negotiating with borrowers who seem to be withholding information. On the other hand, if you demonstrate your lack of ability to repay by disclosing your whole situation, banks will negotiate with you. Really, they have no other choice. Regulators will not allow them to foreclose on every property in their portfolios.
Here are some other tips so your offer of information doesn’t get rejected on sight: Back-of-the-envelope deals are not reliable. Neither is your word, alone, because regulators are skeptical, and they are watching over banks’ shoulders. And those reams of spreadsheets compiled by your bookkeeper or accountant? They may be understandable to the preparer, but most are unfriendly to the stakeholders.
Next, pull out your compass, a business plan, and plot a course out of the thicket. A credible business plan with a definite exit strategy and progress benchmarks along the way is worth far more as collateral to a bank than your personal guaranty. Your boat and lake-house have zero value in the eyes of regulators. Regulators want to see a plan for maximizing returns from a bank’s credits.
Information is bee-repellant for banks. And banks are giving a break to those who proactively provide credible information that the bank can use to deal with regulators. Some banks are even outright helpful to those borrowers. With regulators at bay, banks, like borrowers, look at workouts as paths out.