In the world of real estate, more often than not, real estate investors make a decision of taking a loan for purchasing their commercial real estate property against investing the entire money out of their own pockets.
Since there are a lot of options for raising loans and different types of commercial real estate loans to be raised, often many investors get tricked into making wrong decisions which they will pay for!
Such mistakes can prove to be costly sometimes and they are sure to de-motivate the investor from investing in commercial real estate again.
The possibility of making mistakes in this regard shouldn’t keep an investor away from investing right?
So, here are some top 10 commercial real estate loan mistakes which people have been committing for decades.
Knowing them in prior will help you keep away from committing them.
Because we all know that it is always better to learn from the mistakes and experiences of others rather than waiting for us to experience all of them as life is too short for it (Okay… that was a tad bit philosophical.. Let’s get started anyway :-p)
Mistake # 1 – Insufficient research
One of the glaring mistakes people have been doing since past many years is that they do not research on the kind of property they are buying and the kind of loan that is the best fit for this property!
There are a lot of options for loans and you need to make time to go through all search options and look out for the best one for you.
We would say that it is no different from a Window shopping experience.
You have to research a lot in order to understand the different loan terms and stumble upon the best deal!
Best of the investors who have performed extremely great in the world of real estate has always made it a point to check about all the loan terms and conditions with different banks and different private capital investors to grab the best deal for the loan financing.
Trust us, spending a little time in this regard will help you immensely in the long run because one wrong mistake in real estate can cost fortunes sometimes (you never know when you will get unlucky… So let’s not take chances :-p)
Mistake # 2 – Not inquiring about all the terms and conditions of the loan
Many investors do not like to take the pain of enquiring about all the terms and conditions of their loan.
And when we say all the terms and conditions, it literally means every single term and condition of the loan.
Being very specific and clear about every tiny single detail is very important because small mistakes can lead to large losses in the world of real estate.
Now, we are not trying to scare you but are telling you to be very prudent and conservative about all the terms and conditions of the loan.
Not every bank and not every private money lender is going to tell you all the terms unless you ask them to.
There may be some surprising condition of the loan like an insanely high rate of penalty for prepayment of the loan and this might be a huge expense for you later.
Regretting later is no point right? Hence, take your time and inquire about every single term and condition of the loan regardless of whether you’re availing your loan from a bank or private money lender.
Mistake # 3 – Not running a background check on the history of a private money lender
When you do not qualify the conditions while applying for a loan with banks or if you simply do not want to avail loan from the bank due to high-interest rates and want to take help of private money lender, it is very important that you run a quick background check on your private lender.
This is very important because there are enough people who have been cheated very badly from private money lenders.
Hence, it is important for you to know if the private money lender is really genuine and for this, you can take certain steps like the following:
- Checking the reviews and testimonials given by their previous customers which would have been put up on their website. In case a private money lender does not have a website, feel no shame in asking him to share some numbers of his previous client so you can talk to them.
- Evaluate his experience and expertise in the real estate industry because loan providers usually are the best people who can provide most valuable suggestions and advice with regards to investment in the commercial real estate.
Read: How Market Data help in Crafting right CRE Investment Strategy.
Mistake # 4 – Taking suggestions from every other real estate investor you come across
Taking advises and suggestions are always good because it helps us open up to a lot of other perspectives of looking at a particular situation, but taking suggestions from every second real estate investor can be dangerous in the long run!
This is because, in real estate, different people have had different types of experiences based on different situations and circumstances.
Remember that people will only tell you the end result of what happened to them and what went wrong with them but you will barely get any idea about what situations and circumstances led to such results.
Too many suggestions are only going to create more confusion making it harder for you to arrive at the right decision.
Taking suggestions from experts is always recommended but friendly advice should be taken only from a couple of much selected people whom you trust.
Mistake # 5 – Not negotiating in order to get the best deal
As there are many options for you to raise your loan from, it’s always good to negotiate so that you get the best deal.
Most people find it very difficult to negotiate and simply agree to the price without thinking about the long-term effects of such decisions.
Be it a bank or a private money lender, it is always better to negotiate and get the best deal.
Taking the help of competent real estate attorney can is this process and gives you better deals.
Read: 10 Things You Must Consider When Choosing Private Money Lender
Mistake # 6 – Having less idea about the cash flows
Many loan requests are rejected by the banks because the loan applicants do not provide a convincing statement explaining the cash inflows and outflows.
Failing to do this will not convince your banker to grant you a loan because of the obvious reasons like not being sure about your income stability.
No matter what your credit score is, it is always important to prepare a very well presented projected balance sheet and income statement that will convince your bank that the deal is going to be a profitable project for them. If they are still not convinced, you have other sources of funds through which you can pay back the loan granted.
Mistake # 7 – Getting in touch directly only with a familiar lender
Just because you know a private money lender personally does not mean that he is the best lender who gives you exciting deals.
Many people make the common mistake of going straightly to familiar lenders without doing the research on other lenders and without even considering the other options they have simply because they maintain a good rapport with this familiar lender.
Having a good rapport with your lender is always good but that does not, in any way, mean that he is the right lender for you. Do not blindly trust anyone!
Mistake # 8 – Relying entirely on others’ judgment on what you should do
Every real estate investor will tell you what you should be doing and which loan is the best one for you. There are no limitations on that!
The suggestions or advice they offer would have worked for them a few years ago for an entirely different set of situations and circumstances.
If a particular method of investment or a strategy has worked out for someone, it doesn’t necessarily mean that it is going to work out for you as well!
Thus, never make the mistake of relying entirely on others’ judgments and only take suggestions and advice from them.
The end decision and the final call can be and must be taken only by you.
Mistake # 9 – Failing to present a definitive business plan
Presenting a definitive business plan is very important when you wish to avail a loan from banks.
Your business plan must include your strategies, the way you are going to deal with a shortage of cash and your projected balance sheet and income statements.
If you fail in presenting a definitive business plan, your bank will not be able to process your loan request.
Mistake # 10 – Failing to select the best lawyer
In many instances of processing a loan in order to buy a commercial real estate, you will need the help of lawyers or attorneys.
Be it providing you the best decisions or helping you get the best deals for your loan, it is very important that you take help of the best lawyers as they are experts in this field and are going to help you without any personal motive.
They were the top 10 mistakes you need to avoid while availing your commercial real estate loan.
Ensure that you do not forget these points because, well, small mistakes can lead to grave losses in the real estate game!