Keep Updated Personal Financial Statements
The best preparation for meeting with a lender – especially a private or hard money lender – is to have your “docs in a row.” When I work with a new client that does not have a current personal financial statement, our first step is to get their complete financial picture onto an organized spreadsheet. Some are pleasantly surprised to learn their true Net Worth, some are disappointed (but motivated!). Everyone thanks for me for this exercise when we are finished. Creating a PFS is also beneficial for owner occupant buyers. It is just as fun to impress traditional mortgage bankers by uploading your loan application to his computer from your thumb drive. You get instant respect.
Don’t Believe “Pre-Qualification Letters”
Many real estate brokers will leave the process of organizing financials to a mortgage broker or banker. But consider the value to your client, and yourself, of working on this together as a first step. By assisting your client from initial financing to post closing follow-up, you earn higher respect as a real estate professional. Also, I prefer to know a clients credentials *before* I spend my valuable time with them shopping for properties. I have found over time that prospects who are unwilling to share financial information with me are far less likely to actually buy, so this one criteria is an excellent method of “separating the wheat from from the chafe.” This is especially true among people who call themselves real estate investors; there are lots of people who purchase real estate investment courses and attend the “guru seminars,” but never actually purchase any real estate.
Whether you are working with a traditional mortgage broker, local banker, or private equity lender, having financial documents organized and presentable at a moments notice is always impressive. So impressive, in fact, that with private lenders it even makes up for a certain amount of weaknesses that may be present in the statement itself.
“Do or Do Not. There is no Try” – Yoda
What’s the moral of the story? As an investor you should always have your financial statements ready to show mortgage professionals, bankers, private lenders, and potential partners. As an buyer agent or broker, you should review (and help prepare if necessary) financial information from your clients. You are asking for problems if you believe a “pre-qualification letter” means your buyer will close. I go so far as to carry mine on a thumb drive that is attached to my key chain. The password protected folder has following documents in .pdf format:
- Color photo scan of driver’s license and SSN card
- Excel worksheet of Personal Financial Statement
- Excel spreadsheet of Real Estate Owned
(includes insurance policy numbers, loan numbers, rate, payment, etc) - Current personal and business bank statements
- Current investment and IRA statements
- 3 Years of personal and business tax returns
- Copies of Operating Agreements for all Partnerships
- Completed 1003 Application
Everyone Starts ‘Somewhere’
Even if you do not have an “impressive” financial statement right now, you should create a PFS. It is important to know where you are in order to determine how to grow your assets and reduce your liabilities. There are investing programs for people of any current financial status. You can indeed get into the real estate business with “no money down and bad credit,” but you must be realistic about the process and the path. And you should not take advantage of the work of others by presenting yourself otherwise, like many novice investors do with agents and owners of property. On the other hand, if you have substantial assets, you will want to learn about programs that leverage and protect your assets to their fullest potential. This usually means finding and working with quality agents, operators and sponsors.
In our next segment on Financing and Capital we will be reviewing ratios of a financial statements, please stay tuned by getting our updates via RSS and/or email.
