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SHOW NOTES FOR EPISODE 223: WINNING THE COMMERCIAL REAL ESTATE LOAN GAME
When you need funding for a new property purchase, time is of the essence. You cannot afford to waste a minute, let alone, months, completing bank loan documents only to find out your loan has been declined. In this podcast episode, 30-year real estate investor vet and software developer John Matheson shares how he discovered a way to take the mystery out of commercial real estate lending and to know if you qualify even before you fill out a loan application.
What You Will Learn
- How to make money paying lender double-digits and how to profit over the top of that?
- What is better than lower interest rate to earn profit and keep moving?
- How to level up into legitimate commercial financing space to get into the larger properties?
- What are the three (3) things that commercial banks look for in underwriting your loan application?
- How to communicate with commercial bank lenders with what they really need?
- How you would know if your numbers qualify before you speak to a lender?
- How to determine the right price to buy a property that will match Loan to Value (LTV) required by the commercial lender?
About Our Guest
John Matheson
John Matheson has been a real estate developer and investor for over 30 years. He is the CEO of Commercial Loan Success, a software and educational platform designed to help small business owners and property investors make more informed financing decisions. He is also the managing member of J. Healy Development, LLC, a company that specializes in developing new projects into sustainable properties.
John has been involved in transactions for developing, permitting, and/or financing of completed projects totaling over $50 million. Through his Commercial Loan Success loan analysis software platform, he helps commercial borrowers and commercial lenders to communicate more effectively, where borrowers are able to approach commercial lenders more confidently, already knowing that their transactions are lendable. He also hopes, that through Commercial Loan Success, he can provide resources and educational materials to help small business owners, entrepreneurs, and real estate investors to confidently obtain financing and grow their businesses profitably, all without being at the mercy of the predatory lenders.
More About John
- His wife’s elevator speech for John, “He’s a real estate developer and software developer, so he’s out of my hair all day.”
- Co-founder of Commercial Loan Success (CLS) software and commercial developer and property investor.
- John Matheson has been a real estate developer and investor for over 30 years so the numbers are pretty big.
- He’s been through 3 recessions.
- Because he is very involved with J. Healy, he has arranged many millions of dollars in private bank financing.
- Had background in real estate sales in his early 20s.
- He always had this goal of wanting to be a real estate developer and not just to own an investment property.
Navigating the Commercial Loan Process
- To do that, he knew that he has to learn the business not just inside-out, but he also needs to learn how to get financing, both institutional and private.
- He learned by doing, and his first transaction principal was small – a building lot for $30,000, which he built a house and sold the house like $225,000.
- What was great about this was that he got a construction loan from a commercial bank, which was at prime + 2 points interest. During this time around late 80’ – early 90’s, interest rates were not 3 and 4% like today.
- When he was in his 30’s around early 90’s, he went to a developer council meeting, and the experienced developer would say that the economy runs at 10%.
- He learned how to make money paying a lender double-digits and how to profit over the top of that.
- This is the skillset and mindset that is not taught today. Today, it is the lower interest the better.
- But in reality, the accessibility to the money is just as important, provided that you have enough profit in the transaction and you can keep moving.
- These are the types of things that he learned. Small transactions can form the foundation for your business and the stepping stone to increase your portfolio overtime.
- To advance to the next level and to get into the larger properties, you need to level up into legitimate commercial financing space to do it.
- After that first transaction, he bought some more building lots and kept moving.
- After each transaction, the loan amount getting bigger. Before he knew it, he has a bank credit line in a 7-digit and was able to level up.
- For John, the commercial banking process is not as difficult as it can sound. But if you have done it, you will start to understand better how to navigate it.
- The Commercial Bank is still the greatest source of the best rates in comparison to expensive private capital and online lenders.
- But what was frustrating was the unpredictability of the bank process. It always seemed that the bank loan process was purposely kept a mystery.
- Also, you can’t afford to be out the due diligence, time, money, deposits, only to find out that your regulated banker can’t do you deal.
Solving the Commercial Loan Application Process with Software
- When you go for a commercial bank loan, you put together a business plan, an executive summary, and attach the numbers pertinent to the transaction (pro-forma financial statements, if it is to build, and available financial statements, if it is existing).
- Put it together in a nice package, bring it down to the bank, meet somebody, do your pitch and then you wait.
- This dilemma can be solved with software.
- First, let’s study the commercial bank business as property investors, and see how it really works.
- One thing about commercial mortgages, for the most part, even though the banks don’t tell you this – the underwriting of the transactions side, the property side, is very straight forward.
- In a fantastic book “Commercial Mortgages 101” by Michael Reinhard, a banker himself, breaks down commercial banking in one page. He breaks down what the commercial bank needs to be able to actually underwrite your property side of the transaction into 3 things:
- If you’re dealing with a cash flowing property, they need Net Operating Income (NOI). What is the income minus the expenses on the property.
- They need to get the capitalized value on the appraisal of the property. They need to know what it’s worth. Put it into the loan to value (LTV) formulas.
- They need to know the Debt Service Coverage Ratio (DSCR) is. It is the amount of cash flow you have over the top of your mortgage payment each month. Banks require a ratio of 1.25 or more debt service ratio.
- If these 3 things are all that the bank needs upfront, why don’t we change the conversation with them and just give them those 3 things. Just give them what they want and then ask them if they want to continue conversation with you.
- This is exactly what “Consumer Loan Success” software does.
When Need Creates a Solution
- After the recession, John needed to refinance a loan but some of the lenders he used to deal with were no longer around and he was having difficulty finding a bank who would do the deal.
- The bank he had dealt with for the last 15 years was merging with another bank and they reps at the bank asked if he could “take loan out of that bank.”
- So he started to network for a resolution to find a new bank.
- Googling for a solution, putting in your social security number and your financials did not seem real appealing. He was not comfortable doing that
- He networked with people he knew, some commercial brokers, and was referred to his now partner in Commercial Loan Success, Dan Crowley.
- Dan Crowley, is a commercial banker, by trade, he is a bank consultant for 30-35 years. A heartfelt entrepreneur.
- When John first met Dan, he pulled out his laptop right away, pops it open and asked John for his income and expenses on the property. After about 2 minutes, he looked up to him and said, “You’re a go.”
- Dan plugged John’s numbers into his own commercial real estate software program he has been using for 25 years. This program is based on common commercial banks guidelines and can tell if a loan application is a “stop” or a “go.”
- He asked Dan what he had on his computer that could so quickly assess the viability of a commercial loan. Dad said that he had developed software that he had been using for over 25 years. Furthermore, he had vetted over a billion dollars worth of commercial property and/or business loans for his clients.
- John asked him how he could get the software for himself and Dan said he couldn’t. It was his own proprietary software.
- Relieved from his angst and amazed with the result, John shared his realization with Dan on the implication this software could have on everybody in the property and business loan space in general.
A Software Company Was Born
- He immediately offered Dan the digital nationwide distribution of the software and started a partnership.
- From there forward, their collective goal with CLS has been to take the mystery out of the commercial bank process and to empower every real estate investor or entrepreneur with the knowledge of the likelihood of their transaction in loan requests be it deemed “stop” or a “go” by a bank before they ever speak to a lender.
- This helps the real estate investor to know if his numbers qualify before he even speaks to a lender — no more time wasted.
- This eliminates the type of pain common in the banking process and allows you to do your financing business with the bank with confidence.
- No more wasting time on a deal that can’t get fair financing.
Cutting Loan Decisions Down to Minutes
- It is just as simple as inputting all the information (e.g. Schedule E, CPA docs) into the software and running an analysis which is summarized in a one page document — called a OneSheet– that is designed only for bankers to read, in “their language.”
- You print out the OneSheet, take it into a bank and present it to the banker.
- John’s company tells you what to tell the banker when you present the OneSheet.
- A bank can glance at the one page document and assess in one minute or less whether the loan is of interest.
- This helps anyone to be well-prepared to deal with commercial banks, government and private lenders, especially in starting the conversation. However, there will be differences in underwriting metrics.
- The software also determines the right pricing for a property to get a loan.
- With the bankers interest, it’s then easier to present your other documents (business plan, sponsorship info, etc.).
Common Mistakes of Commercial Borrowers
- Babson College did a study of people going in for commercial loans and found out that people generally got 50% of what they asked for. People who got educated on the banking process, generally got 30% more than those who did not get educated.
- Bankers love to maintain the aura of “mystery” to the whole application process. You can get denied and not even know why.
- Underwriting is more predictable on the property side and less predictable on the sponsor side.
- One of the biggest mistakes most borrowers make is going in unprepared.
- Another, is being under-funded. Not taking enough money from the lender.
- Lenders, historically, have always been known to reduce your Loan to Value (LTV) to as low you can go to minimize their risk.
- When you’re under-funded, that’s where you can make the most mistakes.
Advice to Audience
- Build a team around you who are experts in the things you’re not.
- Hire experts. Make sure the numbers are good.
- For example, if you hire the right property manager, before you get the loan, that could meet the “experience” requirement for the bank.
- Know if it’s a good deal, first! If it is a good deal with the bank, it is a great deal for you! Banks don’t lend unless it is a really a good deal for them.
Where He Sees His Business in the Future
- Wants to see the software company continue to grow.
- Also, currently, John’s development company has 400 units multifamily, mixed used property permitted, self-storage and he wants to scale, with the way that the market is, and the readily available financing, to double their size in the next couple of years.
Rap-It-Up
- Favorite Real Estate book: Think and Grow Rich by Napoleon Hill
- Favorite business book: Never Split the Difference by Chris Voss
- Most valuable web site for success (other than your own): Any Project Management applications Slack, Asana
- Favorite app: Zoom
- Favorite Quotes: “Fac et spera” – which is Latin for “Do and Hope” and “When you reach the end of your rope, tie a knot in it a hang on” –Franklin D. Roosevelt
- If you had to start all over, knowing what you know, and you only had $1,000 cash, what would you do to launch your real estate investing business? Since it is a different world since he started, he would make sure that he has a license to sell something, e.g. real estate, construction, etc. Make sure that he has a website, set it up with a landing page where people can opt in and go from there.
How to Reach John
Special Free Offer for Old Dawg Listeners
- For the listeners of Old Dawg’s REI Network, get a free giveaway of Chapter 2 of the upcoming book “Commercial Loan Success” go to: web.commercialloansuccess.com/dawg
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