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Experience must be direct and relevant. For example, chiropractors will not have the necessary experience to run a hair salon, but they may be considered experienced if they want to own a physical-therapy company. The similarity between building a practice would be considered a transferable skill, provided that they owned the initial practice and were not just contract employees. Further, physical therapy and chiropractics are similar in that they both work with patients and usually are paid through insurance. Therefore, the knowledge of medical billing is important. Also, a chiropractor's patients may become clients of the new physical-therapy business. Clearly, this is a good fit.
Experience also is important when a client seeks a loan for an investment property. For example, if clients are buying an eight-unit multifamily building, the lender will want to know if they have owned investment real estate. If clients owned another small-unit complex, then the lender typically will be satisfied. If not, it is a strike against the clients in the underwriting process. An eight-unit deal likely won't be declined for lack of prior investment experience. But lenders may increase the necessary deposit and decrease the loan-to-value ratio.
If it's a larger property -- a 20-unit complex, for example -- and your clients have no direct investment experience, lenders will more likely turn down the deal unless there is significant cash flow and a large downpayment.
Lenders today want to see that clients have previously owned and managed investment properties. Such experience will show that the clients know what they are getting into with their purchase. The last thing lenders want is another delinquent loan on their books. This applies to other investment types as well, such as self-storage facilities, recreational parks and mobile-home parks.
To show experience in investment property, your clients may partner with someone who has owned previous investment real estate, or they can start small and work their way up. For example, your client may buy a duplex then move to an eight-unit property, then to a 20-unit property and so on.
If they are acquiring a business, your clients can attain the necessary experience by bringing in a partner. Working for a period of time in the industry they wish to enter or taking a class or training program in the same industry also may satisfy a lender.
For example, say a client with no gas-station experience other than pumping his own gas wants to buy a gas station. The lender may consider the company's four-week training program to be enough for the client to become proficient in operating the station. In addition, if the seller stays on for a training period of another month after ownership transfer and the previous employees also remain, the lender may be further convinced.
Another technique is to make the previous business-owner a contract employee or sales manager for a short period during the transition time. Previous owners who have made a significant investment into the business usually are glad to watch over it and help the new owner succeed.
With lenders being much more selective and brokers' time becoming more valuable as they chase fewer qualified deals, walking away may be the best suggestion if clients' relevant experience cannot be obtained.
Harlan A. Friedman, J.D., is
president of Lightning Commercial Funding Inc., a California mortgage broker that specializes in financing commercial projects, from new business startups to large commercial transactions. He has more than 25 years' experience as an investment banker and financial consultant. He is the author of GET Your Loan Closed!, a commercial loan training book that can be purchased at getyourloanclosed.com. Reach Friedman at (858) 592-0659, ext. 101, or firstname.lastname@example.org, or visit loanforbiz.com.
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