You Have A Purposeful Plan — Now You Need A Lender You Can Trust — A Performer

Posted @ 4:24 pm - Filed under 1031 Exchanges, Purposeful Planning, Real Estate Investing, Sez Me

Your lender will be one of the most important players in the execution of your Plan. If they screw up, you can end up in very bad shape. Very good lenders with high integrity and a sense of pride in their work are no less rare than a real estate broker with those attributes. They’re hard to find. Because this is true, I don’t have a large group of lenders from which to choose. Currently, I use three, with a new one on deck about to do his first loans for me.

Allow me a lender horror story. I tell this story so you might understand why I’m so insistent upon using my proven lenders. The harm caused by incompetent and/or dishonest lenders can not only be destructive, but emotionally wrenching for the client.

I’ve used only a handful of lenders in the last 20 years. Lenders who simply perform are few and far between. They’re either over promising and under producing, or explaining why a full doc loan with a FICO of 773 justifies a couple points from my client. Pardon me if I’m a little touchy on the subject of lenders, but I’ve learned that as a group they’re not reliable.

Let me nail this down more clearly. My firm now has a non-negotiable policy about lenders. Clients can’t use their own. I don’t care if it’s their mother, their best friend, or their spouse. My lender or I won’t work with them.

Here’s Dan’s story. Dan’s the last client who will use his own lender.

I’ve violated my policy twice in the last decade. The last time, (and I do mean last time) was late summer last year. Dan, a client who had been referred to me a few years ago had been in my office for his annual Plan review. He’d invested in several Phoenix properties, and was selling another investment in another state in anticipation of a tax deferred exchange into Boise. Though he’d used my lenders in Phoenix with excellent results, he insisted his very good friend ‘Mary” was to do the loans in Boise.

Dan is a very intelligent guy. But I couldn’t talk him out of it. We finally compromised. If I’d consent to meet Mary in my office and she impressed me as an appropriate lender, I’d consider it. To make a long story short, she said all the right things, and in a weak moment I agreed to Dan’s request.

What happened?

Mary, despite direct statements to the contrary all during the three purchase escrows, obtained loans for her very good friend Dan, that caused great problems. Instead of breaking even, the three properties would now cost him over $20K a year in negative cash flow! She simply never told the truth to Dan or me for the entire process. I was told in no uncertain terms she was obtaining the exact loans I’d instructed her to deliver. She said in equally concrete terms that indeed she was getting Dan the exact loans I’d required.

Dan was executing a tax deferred exchange. Learning of her betrayal and deceit put him into a position requiring him to pick between two terrible choices. Either he back out at the last minute, or close the the uplegs of the exchange with the massive negative cash flow. If he backed out it wouldn’t just be the loss of three deposits. It would also mean paying over $30K in capital gains taxes. Counting the lost deposits, taxes, and loss of future gains, he had no choice but to close the exchange as planned.

Dan was devastated. His first words to me were that I’d tried to warn him of this possibility. He felt betrayed, humiliated, and defeated. We’ve now paid off those loans at an additional cost of almost $15K in fees. The properties are now breaking even. Forgetting the money for a moment, he lost a very good friend he thought he could trust. She ambushed everyone. He was not a happy man.

The lender you use to help you execute your Plan must be as reliable as the sun setting in the west. Mistakes or bad performance on their part can be financially traumatic. When my clients are told they are approved by one of my lenders, that’s exactly what it means. Anything less is just courting disaster. The stakes are too high not to be sure. If your lender isn’t that good, why would you even consider using them?

This entry was posted on Thursday, February 22nd, 2007 at 4:24 pm and is filed under 1031 Exchanges, Purposeful Planning, Real Estate Investing, Sez Me. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.