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TEACH A MAN TO FISH
By Joel S. Pate
Last Saturday, my wife and my two daughters joined me for lunch at our favorite bay side restaurant. It was a great day. Blue skies, a little chill in the air, just an overall nice day. That is, until we began to encounter the place that we choose to fulfill our desire for good food and a good atmosphere. We also had the expectation of above average service.
The point of opening with that story is simple: I didn’t want to go to the restaurant for the same reasons the restaurant wanted me to go there. They wanted my money with the least amount of expense they could get by with. I wanted a nice meal and an enjoyable atmosphere which included a good wait staff, etc.
Over the past few weeks, part of this article has dealt with a fact that I believe everyone in any service business must understand, and especially those of us in the mortgage business: No one wants a loan. No one wants to go to a restaurant. We only want what the loan will help us purchase. We only want from the restaurant what we have decided to have.
Does that make sense?
I believe that as a business (and you are a individual production unit defined as a business) you must never forget that a customer has an expectation of the experience of dealing with a mortgage professional. If you decide to structure your operation in such a way that you overwhelm the prospect/customer/past customer with expertise, knowledge, kindness, value, and the list goes on and on--oh yea, the biggie: trust--you will see a dramatic increase in business that will overcome any and all downturns in business.
While downturns effect every business, in every market, there is an absolute difference in the severity and length that businesses that have excelled at all levels of customer satisfaction will suffer as compared to the other businesses whose customers had an average to poor experience.
Now, why am I still dealing with this subject? It’s easy, there are two things you need to remember if you can only remember two things that I ever say:
1. It is very important who you know, but it is even more important, who knows and trusts you.
2. If you do a great job, with each precious customer, more people will recommend you and conduct business with you again.
These are the two keys to success in any business.
For those of you that have decided to move into the one-time close construction perm niche market, knowing and understanding these two key elements will cause you greater success as you begin to deal with builders and especially their customers.
I specialize in builders that build less than 10 to 20 homes per month. They have a special need that larger builders just don't encounter. The small to medium size builder faces the need for more capital and is very limited in the opportunities to grow his capital base and thus his business.
That's why we are having such a great success with our message to builders. Builders want to do one thing above all others: Build a house and make a profit. Under the traditional financing mechanism, while they must still build the home and make a profit, they must also interact with the bank to finance their business. And for some reason, banks want to keep a builder very tight on money.
In order for the builder to build homes, he must borrow money, and lots of it. Just imagine for a minute your average small builder has five homes under construction. If the homes have an average value of $300,000 per home, the builder can only borrow approximately $210,000 to $240,000 per home. I can tell you from experience and from speaking to builders on a daily basis: $240,000 is almost enough and $210,000 is $30,000 short of what it will take to complete the home.
I want you to get this point: It's not that the builder doesn't want to borrow enough money to build the home without coming out of pocket with any of his own funds, it is the simple fact that the bank will not loan the builder enough money.
The builder must bring capital to the table. So let's do the math: With an average of four homes under construction at one time, and using the average $25,000 equity per home, the builder must have $100,000 in what is called "current assets."
Additionally, to run their business in a professional manner, the builder needs to double that number because he is required to pay for subs work prior to obtaining bank draws on many occasions. From my personal experience and the word of builders from all over the country that I deal with on a daily basis, I can tell you that if a builder has four or five homes under construction, he must have at least $200,000 in "current assets" to successfully run his business or he will fail.
So, a builder that doesn't have $200K but wants to begin to build four or five homes at time must raise capital in order to increase the performance of his business. Or the builder that already builds four or five homes at a time must raise capital in order to increase their volume.
There is only three ways for a builder to raise capital:
1. Retained earnings
2. Bring on an investor
3. Borrow on the long term basis for short term capital needs
That seems easy, but when you really begin to dig into these alternatives you will find that most builders cannot raise long-term debt, investors want 20% to 50% of the profits, and retaining earnings means a builder must lower his standard of living.
While in the world of the bigger builder, the prospect of raising capital or having investors is a solution. However small builders, find it difficult, if not impossible to raise money and or share the profits on a home with an investor.
That's where I come in and that is where you can come in too. If you learn the principles of providing builders with off balance sheet financing you will become a hero to the builders that know you because you can show them a way to increase their business without the need for more capital.
You can show them how to build homes without having to borrow money. Utilizing our method of financing homes, you will become irreplaceable to a builder and become his preferred lender. He then will send most, if not all, of his buyers to you. Because without you, and the knowledge of off balance sheet financing and how it affects a builders capital structure, the builder will be forced to take a pre-qualification letter to the bank and use his own balance sheet to borrow money again.
Once a builder gets hooked on building the same amount of houses with less money or more homes with the same amount of money, he will never want to go back to the bank and you will become their hero.
Remember how I started the article? It is important who you know. But, it is more important who knows you, trusts you, appreciates you, and has directly benefited because of you.
Offering a builder an alternative financing mechanism that allows him the benefits only available through off balance sheet financing will endear the builder to you and will make you his preferred lender. If you do a great job with these customers, you will find that you maintain and even increase your volume while other mortgage originators are suffering through the next few years.
"If you give a man a fish, you feed him for a day; if you give a man a machine that makes fish, teach him to operate it, and enslave him, you feed yourself for a lifetime."
Author Unknown
If you would like to receive additional information regarding off balance sheet financing for builders, register for one of my conference calls by visiting www.vadiumgroup.com/cpexpert.php.
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, Mr. 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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