If you’re reading this, you’re likely considering getting into commercial property investments. Our goal, at Acumen Finance, is to help you do just that. And when it comes to preparing, whether it’s to attend a fast-paced auction or transact a private treaty sale, the pre-approval letter is your Holy Grail to buying the property of your investment dreams. But not all pre-approvals are created equal, and here, we’re going to tell you why.
As we mentioned, many lending institutions won’t typically deal directly with the average investor to secure investment financing. They prefer to deal directly with established channels and brokers with whom they have a working relationship. While this might sound exclusionary, it’s actually in everyone’s best interest as the lending process for commercial property investment is much more complex than a regular mortgage loan, and the approval depends upon many more factors which vary greatly from lender to lender.
For this reason, it is in your best interest to establish a relationship with a broker who understands the nuances of the processes and the players. Acumen Finance understands the specific lending criteria and limitations of most Australian lenders - from the Big Four and Credit Unions, to private lenders. With this knowledge and expertise, they not only will help you put together the loan application package, but they will guide you to the lenders most likely and able to underwrite your loan request.
So let’s begin with a quick overview of the pre-approval process. Then we’ll let you in on Acumen’s value-added services. If you prefer to talk with a live representative, please feel free to contact us directly.
As we mentioned in our Commercial Property Investment How-To Guide, there is a difference between Pre-approval and Pre-qualified - and it’s an important one.
To summarise: A pre-qualification letter is granted to the borrower (you) based solely upon the information you provide without any verification. This is not a guarantee of a forthcoming loan. It merely states that you “should” be able to get a loan for “X” amount provided your information is correct. Conversely, the pre-approved letter follows a critical review and verification of all financial and background information you provided the lender. It indicates a conditional approval that the lender intends to finance a loan upon request. But there is a caveat - the investment property must conform to lender criteria.
So, the above laws apply everywhere - they’re the lay of the land. However, local government has the power to implement additional laws and regs in the states that they rule. Let’s take a look at the changes across the nation.
Pre-Approval is no Guarantee
Unfortunately, many buyers have been left holding an empty promise when it came time to close a deal. The problem is that banks can rescind the “conditional approval” when they evaluate the property and its perceived risks. Or, possibly worse, change the terms of the deal.
Often, when a Tier 1 lender assesses the property in question, they will look at the blemishes and backtrack on gearing ratios and other factors that ultimately change the deal, leaving the borrower with some nasty last-minute surprises.
If the new terms are unacceptable, the borrower is left scrambling for alternative lending sources - and where time is often of the essence, this can kill a deal. Some may find other sources of equity to appease these lenders, others may resort to Tier 2 or Tier 3 lenders who can often come to the rescue, but the borrower is often faced with higher rates and higher closing costs as a result.
Further complicating matters, Tier 1 major banks have ASIC monitoring their lending activities to ensure they comply with regulations that protect the lender and its banking customers vis-a-vis maintaining a certain balance of exposure to risk, location of investments, maximum financing in certain areas or commercial asset types. Tier 2 lenders, such as Credit Unions and Building Societies, are also restricted by their charters with similar rules. We will cover this in more depth in our upcoming mini-series Tier 2 Lending Limits. Bottom line: if you don’t fit into the “opportunity niche” of T1 and T2 lenders, you may find it difficult, if not impossible, to secure financing.
We don’t want to add any undue stress; instead, we’d like to present a solution. But first, let’s understand the pre-approval process further.
Ready, Set, PAPERWORK!
Your ability to qualify for any loan will come down to your strengths and weaknesses. A prospective lender will scrutinize anyone who will act as a manager, general partner or who is (at least) 20% owner of the borrowing entity. Things such as personal net worth, income and expenses, credit history and experience in investment property are all considered.
Additionally, lenders tend to focus on the weakest link: a bankruptcy, a criminal record or a past default can disqualify anyone - or force a collective to remove that individual from the borrowing entity. Therefore, personal pre-approval of all interested parties is the best starting point. The following list is by no means inclusive; every lender is different and may have different requirements, but at a minimum, be prepared with:
- Financial statements
- A list of assets A minimum of two-years tax returns
- Bank accounts statements
- Investment and retirement account statements
- List of credit cards, loans and other debts
- And a personal credit report
The Credit Report
The credit report is probably the most important document to a lender. However, as most people know, every time your credit report is accessed, it affects your credit rating - excessive access can damage your good standing.
Therefore, Acumen asks you, the borrower, to provide your own report. It is as simple as requesting the document and providing it with your loan request. Since the report request originated from you, the owner, this will not affect your rating - it is not technically an “application” for credit and therefore will not appear on your record. Then, when the lender goes to finalise the loan and performs its own credit search, there will not be any record of a request for credit.
Why Use a Broker?
Sure, it’s possible to do this on your own - much like learning to swim by jumping in a ripping-fast river. But with a qualified broker on your team, the process is much more likely to be successful without killing you. A good broker brings experience - they know who is the appropriate lender willing and able to finance your investment. They can get you a better deal because they are specialists who understand the complexities of the transaction, and they have a relationship with the banking decision-makers. A broker can get you competitive pricing because lenders know they are shopping with the competition, too. And since they have the connections to Tier 1, Tier 2 and Tier 3 lenders, they can often find larger loans with less restrictive terms.
Acumen Finance brings all this to the table and more. Their in-house team can craft professional credit papers, written by experts and formatted to institutional standards. The letter will spell out the strengths of the deal, and if the deal is particularly complex, Acumen’s team will clearly and concisely lay out all the specifics in a comprehensible manner to appeal to the lending community.
Acumen uses its insider connections and expertise to filter through banking regulations and limitations to find the right lender from the outset, saving valuable time and money. They do this by individually assessing the LVR and the size of the deal, and then compare that information to the available products across a wide range of lenders.
Further, Acumen will analyse borrower specifics - if there is any level of borrower “impairment” or special circumstances, Acumen can assess these on a case-by-case basis and guide you toward an appropriate solution. So if you (or a member of your “investment team”) has any financial anomalies in the paperwork, such as a judgement, other debt, or perhaps there’s that ugly “over-exposure” situation, Acumen can help you sort the details. It may mean that your LVR isn’t what you had hoped, or perhaps you’ll have a slightly higher interest rate, but at least you’ll understand what is realistic and what is not for the asset or project you want to finance. They’ll be no 11th-hour surprises. Contact us to start the pre-approval process now.