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DO YOU HEAR A SUCKING SOUND?
By Joel S. Pate
Over the next few months, a new breeze will blow into many cities across America. It will not be a cooling, soothing breeze. Instead, it will originate from a sucking sound that is coming from the front doors of banks all across town as they begin to call in construction loans and lines of credit. In many cases, the banking regulators actions will be very disruptive.
Even if a builder is financially sound, the bank will be forced to reduce or eliminate his line too. Why? The regulators are demanding that they do it. One thing about banks and regulators to remember: Usually, nine out of 10 times, the regulators get their way.
As you know, I concentrate on helping loan originators become experts at providing off balance sheet financing to small to medium size builders. While our lenders will be impacted to some extent by the bank regulators, and thus we may have to adjust programs slightly, the majority of our money comes from the lower heaven on earth: Wall Street.
As real estate lending continues to shrink, we are receiving calls from the big boys on Wall Street as they look for continued sources to make money. They agree that the small to medium size homebuilder, building FHA to Fannie Mae price range homes, even jumbo market prices as well, is the safest market. And, they want to get into it with lenders that understand the concept and have a proven track record that demonstrates their understanding.
What this information means to you: as your market contracts, you might consider entering the niche market of providing well deserved homebuilders with off balance sheet financing to finance their business. One thing I know about builders: overwhelmingly, they are loyal, will spend money to maintain a consistent volume of houses, and once they find a professional that solves a problem for them, they don't change.
In last week's article, I suggested that you create a worse case budget for your business to reflect on as we spend the next few weeks reviewing the cycles within a cycle and the micro versus the macro market. I also gave you a short history of some of my experiences in those markets over the years, and a few ideas to consider as you move toward the end of the year. For those of you that missed last week's article, I suggest you check our archives before moving forward.
The majority of the readers of this column are entrepreneurs. In a nutshell, we are positive thinkers. That's good. However, while it is great to be a positive thinker, you must also understand the market, how the market reacts, and attempt to understand, really, what the market is doing and how long will it do it for, and deal with this somberly.
Years ago, as I entered a market much like this, I went to a seminar in Houston. David Weekly, a fine homebuilder from Houston who has now expanded into several markets, spoke during one of the breakout sessions. David was in the middle of the oil bust of the late 80's so I was fairly confident then, and am positive now, that he really knew what he was talking about in relation to down markets. David made several points during that session that I have remembered and attempted to live by for the last 25 years. I mentioned several of those statements in last week's article and will touch on them again in this article.
Another market cycle story: There was another cycle within a cycle that I experienced started in 2001. In February of that year, I entered the down payment assistance business through American Family Funds Inc. of Mobile, Ala. For three years, our business grew from three transactions per month, to almost 1,000 transactions per month. We were making a lot of money.
Then, as the overall real estate market became a sellers' market, our business plummeted. The total damage: 70% of the entire industry's volume collapsed and approximately 70% of the price per transaction collapsed as well. I relay this story as a warning. As the market changes, you should try to stay ahead of the freight train as you negotiate to end leases early, have lay-offs, firings, more lay-offs, more firings, move to even smaller locations, reduce your number of phone lines, decide not to go to trade shows, etc, etc, etc.
You see, I did not completely take David Weekly's advice: The market for our business was a lot worse than I thought. Really, in retrospect, I just would not allow myself to imagine it could get any worse. Who could imagine a 70% drop in business when all that you heard was that the market was so busy? I wish I had made larger cuts every time. Instead, I cut a little here and a little there. I should have taken David's advice. "It is worse than you think," and "reduce your overhead more than you think you should.
But, when the market is in a downward cycle, you must reach down within yourself and cut your overhead to the point that you can stay in business if the market reaches a point that you can't even imagine. I know it sucks, but, it's really good advice. Let me know if you take it.
Imagine this: While you were having great success in your business during the last three years, other segments of the mortgage market, FHA loans, lost 70% of their business. Now, as the rest of the market is "collapsing," the FHA market is increasing for the first time in years. Another example of a cycle within a cycle.
Now that the sellers' market has collapsed once again, and more and more sellers are willing to offer seller concessions, we are receiving calls from brokers all over the country. The typical conversation goes like this: "We haven't done a FHA DPA transaction in two years, remind me how to do it."
I tell you these stories because I hope they will give you insight into what you are facing now. The only thing you can count on as a mortgage professional is change. Markets are great, bad, flat, or improving. If you have been in the business for the only past five or seven years, you have experienced the best of the best.
Don't forget the advantage that you have. You do not own $100,000 lots that you must build $600,000 homes on to make a profit. Nothing in your universe demands that you continue to attempt to sell loans the same way you have for the last few years to the same type borrowers or to even the same lenders.
You have the distinct advantage to be fluid. Think in terms of "guerilla warfare." Which markets within your markets are showing signs of life? That is the question you must ask yourself, and find the answer to, as soon as possible.
To find out more about the exciting niche market of off balance sheet financing to small to medium size builders contact me via my website at www.vadiumgroup.com/cpexpert.php. It's time you make a decision that will assist you in overcoming the realities of the macro and micro economic markets that we find ourselves in. I wish you well.
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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