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THE BENEFITS OF NO PERSONAL GUARANTEES
By Joel S. Pate
A builder has several options for financing the construction of homes:
1. Cash on hand
2. Lines of credit where the house is not encumbered
3. Individual construction loans on each house using flimsy pre-qualification letters and end loans
4. One-time close construction perm loans where the customer borrowers the money and the customer's lender advances the money to the builder on a draw schedule.
No. 4 is what I specialize in, what I think you should consider becoming a local expert in, and the only one of the four in which you can become the preferred lender for the builder and the one originator they thank each Christmas.
Once a builder understands the one-time close construction perm loan and how it fundamentally changes the financial structure of his company, his personal financial liability, the reduced need to grow his retained earnings, the ability to improve his cash flow, etc., etc., etc., he/she will seek out a local professional loan originator. I want to help you be the person that will convert his/her operation to the use of OTC-CP loans as fast as possible.
Why?
- No personal guarantees
- Improved profits
- Improved cash flow
- Increased opportunity to sell contingent deals to customers that have a house to sell
- Nearly unlimited growth potential (banks will not let him grow as fast as OTC-CP Lenders)
- The opportunity to take money out of the business
- The opportunity for a young builder to grow
- The opportunity for a superintendent of a big builder to go into business without even a small balance sheet
- Etc.
Over the next few weeks, we will use this list as the guide for the next series of articles. But for now, let's start with No. 1: No personal guarantees.
Except for extremely wealthy builders and extremely large corporations with tons of assets, every builder is signing a personal guaranty on each bank loan their building company uses. The loan might as well be a personal loan. If the building company defaults on the loan, the builder's personal financial statement, credit, is on the hook.
No one wants to default on a loan. Banks do not want a builder to default on a loan. But we all know builders that have gone out of business for one reason or another. When that happens, the bank holds them personally responsible.
The other side of the personal guaranty is that the bank must limit the number of loans and the total indebtedness of the builder/individual to the bank based on proven risk methodology. One of the tests is called current assets to current liabilities. This test measures the builder's ability to pay his bills without selling his assets: land, buildings, etc.
It compares the builder's cash on hand, securities, money markets and houses for sale, to all debts that are due and payable within 12 months.
So, a builder that retains all of the money he makes building houses, can only grow his business as fast as the accumulation of cash on hand will keep his current ratio in line.
But, who can afford to leave all of the profits in the company. After all the builder is in business in order to make money, provide for his family, purchase his own home, pay for college, etc. This of course, as you know, is expensive.
The result is that the bank will be required to limit the number of loans it provides a builder based on formulas that are derived from the builder's ratios, and those ratios are directly impacted by how much profit the builder leaves in the company, and thus does not spend on his lifestyle.
In comparison, using a OTC-CP Lender, the builder:
- Can increase the number of houses he builds because he is not limited by the banks limits.
- Has no personal guarantees.
- Will need to retain enough cash in the business to fund operations between draws, but since the CP lender is funding 100% of the cost, he can extract additional capital from the business.
These three basic benefits are usually enough to convince the builder to talk to you.
Well, enough for today. In the next article, we will discuss item No. 2, "How does utilizing OTC-CP loans improve a builder's profit."
If you would like to receive additional information regarding one-time close construction permanent lending or join one of my conference calls on this topic, send me a request by visiting www.vadiumgroup.com/cpexpert.php. Remember: It's not enough to know the benefits of the OTC-CP loans. In order to make money, you've got to have a lender that understands this complex loan and a mentor to help you jump start your business with the builders.
Dedicated to coaching YOU to CP Loan Success!
Joel S. Pate
Joel S. Pate, a dedicated entrepreneur, has spent more than two decades in the building, mortgage, and real estate industries and has been involved in over $100 million in construction loans and over $1.3 billion of residential lending. As the CP LOAN EXPERT columnist, Pate provides straightforward, unbiased advice about every aspect of construction permanent lending. If you ever wanted to unravel the mystery surrounding new construction lending, then you should tune in.
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