Summary
Now that we have a new reason to celebrate some random holiday, I want to add a new one. Any excuse to pretend that this day, week, or month is special will do.
Summary:
Let’s Celebrate the “No” in “National No Skin in the Game” Week
Just say “Sorry, but no” to loan requests where the Borrower has no risk capital involved, and smile with the awareness that you do not need the aggravation or future servicing problems! Most experienced lenders can see this train wreck coming a mile away.
Now that we have a new reason to celebrate a random holiday, I’d like to add one. Any excuse to pretend that this day, week, or month is special will do.
I want to designate this week as a business week to bring joy and celebrate the “NO’s” that come out of the mouths of every lender, including mortgage brokers, bankers, and others who engage in securitization to pool loans and sell them off to sources such as Fanny May, Freddy Mac, or other secondary market sources.
The ‘NO’ occurs when a prospective Borrower or Borrower’s representative calls to discuss a loan scenario, knowing that the Borrower has little or no money in the proposed transaction. In the industry, this is referred to as “No Skin in the Game,” a term that describes a situation in which the Borrower has no financial stake in the loan. After attending a fix-and-flip seminar and paying fees of $1,500 or more for a couple of days of hype, borrowers develop a new awareness, confidence, and even arrogance about how it is the right decision for the lender to make this loan. If the lender refuses and says “NO, the prospective Borrower will suggest that the decision is based on ignorance or a lack of experience. After all, it is a great deal!!
Thousands of hours are wasted across the country on this futile exercise, as productive hours are spent by loan representatives who, like opportunistic wealth seekers, continuously solicit without offering money. These exercises include lengthy discussions with borrowers who have no financial stake in the loan, negotiations with unrealistic expectations, and attempts to educate borrowers about the risks of their proposals.
Article:
It is easy to borrow 100% of the capital to purchase a property, cover fix-up costs, and pay ongoing operating expenses. If all goes according to their proforma, the prospective Borrower will become a capitalist genius. However, if anything goes wrong, such as misjudging the budget, hiring unqualified contractors and subcontractors, failing to lease up to pro forma, or a market collapse, the consequences can be severe. The Borrower may walk away without any responsibility, leaving the lender with a significant financial loss. With the Borrower’s newly discovered knowledge and wisdom, they can assume the position of an economic genius either way.
The story goes like this: “Ring, ring, ring.” Immediately after the usual introductory courtesies, you proceed to the standard questions in accordance with customary real estate lending practices. The client will sway, dodge, and subvert, as some experienced Borrower(s) do.
I want to borrow $300,000. Great, what is the collateral? It is a two-million-dollar property. Great, will this be a first or second loan? It will be a second. How much is the first loan? It is one million dollars. So, does that mean a total loan encumbrance of $1.3 million, including the first loan of $ 1 million and the second loan of $300,000 on a $2 million property? That sounds like a 65% combined loan-to-value ratio. Yeh! It does. That is what I’m looking for. Great, how long have you owned the property? I don’t own it yet. Is it in escrow to purchase? How much are you paying for? $ 1 million. The seller likes me, so he offers me a good deal and handles all the paperwork. don’t need to come up with any money; it’s all there. And then you loan me the $300,000 second, I’ll be in fat city.
According to the Borrower, there is plenty of protective equity. When they finish fixing and renting it, they can refinance it with an institutional lender, pay you off, or sell it at a fat profit.
You see, Mr./Ms. Lender, I am a financial wizard and a genius. At a seminar, I learned how to use economic leverage and flip all the risk to you. If I win, I will make a substantial amount of money; if I lose, it will be your loss, Mr./Ms. Lender. Aren’t I smart?
It would be an understatement to say that I have heard this story more than ten thousand times, a testament to the prevalence of such high-risk loan requests.
By maintaining strict lending standards and celebrating the ‘No’s, lenders can protect their financial health, contribute to the real estate market’s stability, and avoid potential legal and regulatory issues. The whole purpose of this special week is for intelligent and experienced lenders to celebrate the thousands of ‘No’s ’ they have received after being subjected to discussions and loan requests from prospective borrowers with zero net worth and/or zero capital invested.
Suppose a Borrower is successful in obtaining a loan from a lender with no economic exposure. In that case, the lender can provide “risk capital” and become a de facto joint venture partner. “Risk Capital” refers to investment funds allocated to speculative activities that carry high risk and offerhigh reward.