- Written by webmin
- Published: 14 Sep 2010
If you’ve made it this far, you realize that there’s a lot of information that entrepreneurs need to acquire before approaching their banker. The prior text had trips and traps noted, but some require more explanation, so we’ve added them here in this chapter. These are necessarily more or less important, just presented with more information. But even with all the information you’ve been given, there are a few more things you should be aware of before you walk into the bank.
There are certain things your banker isn’t going to tell you. But that’s why you’re reading this book! Learning these tips and traps can save you time, money and headaches down the road. Most of the information in this chapter comes from Ron, from an entrepreneur’s perspective, though Greg has certainly got plenty of lessons to teach about getting everything to look its best and get good results for all parties. Most of the material is from Ron, he’s an out of the box experienced thinker, and has learned many of these the hard or expensive way. But as with tip No. 19, he hired a good tax lawyer to help with the single member LLC to save costs. Remember, you don’t know what you dont know, and it’s important to surround yourself with people that know more!
Tip No. 1 – Appraisals Aren’t Always Needed
Although appraisals are very common on real estate deals, you may not need one if the property’s value is below a certain dollar amount. The threshold varies by bank.
Banks can use tax district appraisals, depending on the loan-to-value ratio, rather than conducting a new appraisal. In the current
economic environment, the Fed is concerned that local tax districts can’t keep pace with rapidly changing property values, because tax districts look at property on only an annual basis. But if the district says a piece of property is worth $200,000, a customer could likely expect to borrow $100,000 on that property — or 50 percent of the estimated value — without a formal appraisal.
Tip No. 2 – All Appraisals Are Not Created Equal
In commercial real estate, there are two kinds of appraisals: Full scope and limited scope. In a full-scope appraisal, the property is inspected thoroughly, while a limited scope requires less information. Typically, a limited-scope appraisal is all you’ll need.
Three factors are considered when a property is appraised:
- Cost: What’s the cost to rebuild this building?
- Income: How much revenue can you generate by renting
- Comparable sales: What would be the price if you wanted to
sell this property?
Keep in mind that customers can’t choose their appraisers. Regulations require bankers hire the appraiser. In the interest of fairness, you can ask your bank to put the appraisal out to bid. The rules have changed dramatically in recent years, so you can’t put it out to bid yourself. The new federal guidelines require the lender to get the appraisal and because of the more cautious approach, the odds are very good that the appraised value will be much less than you expected.
There are times that a lender can ask for an updated appraisal with a limited scope or a “drive by” update or “desktop,” and any of these can save the customer money. Don’t be afraid to ask. Factors such as performance of the loan and or customer, amount of loan and how old the existing appraisal is can guide these decisions by your officer.