Lending is a two-way street. Enact Partners “sells” money to borrowers, but it is not a typical sales transaction. A car salesman will push a car to anyone with a pulse and a credit score, and he doesn’t care what they do with the car after the papers are signed.
In lending, we are very interested in how our customers handle our funds after the papers are signed. We have to pitch our service to the borrower, but the borrower also has to pitch the lender on their project and their ability to carry it out. It is a relationship, not a transaction.
Relationships Are Built on Trust
The best way to gain comfort in a project and with a borrower is to visit the site, shake hands, look the borrower in the eye, and ask lots of questions. It is often during these conversations that we gain unexpected insights, both good and bad. Experienced lenders can make a fairly quick determination of the site’s viability and the borrower’s experience, planning, and ability to complete the project.
To emphasize the importance of site visits, let’s look at two examples.
We recently considered a loan request from the owner of a trucking company. His plan was to purchase a vacant truck stop in a small desert town in southern California. He would rehab the existing convenience store, build out a truck maintenance facility, and reuse the existing diesel tanks and pumps. His trucking company would receive truck maintenance and purchase diesel from his new truck stop company, thereby providing the property guaranteed revenue.
Although it sounded like a good plan, we were suspicious of his proposed rehab cost of less than $1 million. And when we did the site inspection and saw the property’s condition, we were especially doubtful.
After talking through the plan, it became clear that while the borrower was very good at running his trucking business, he had not done enough research on the scope and cost of his real estate project. We called the borrower’s architect, who estimated the upgrades would cost over $3 million to complete.
With the higher number, the project did not make sense, so we chose not to move forward with the loan.
On the flip side was a land loan request. The potential borrowers, who are not farmers, were seeking a loan to purchase a “you-pick” apple/pumpkin/raspberry orchard northeast of San Diego. Not many lenders would look at this.
We made a site visit and walked the beautiful property while the borrowers (a husband and wife) described their impressive real estate backgrounds and their plans for operating the farm both now and in the future. From our discussions, it was clear the borrowers had considered every angle and had assembled a strong team of consultants. We closed the loan with confidence, and the project is doing great.
In-Person Trumps Online
In our increasingly automated world, it would be easy to rely on Google Maps to judge our sites and credit scores to judge our borrowers. But while the Rocket Mortgage approach may work for the highly regulated homebuying industry, it is insufficient to gauge the risk of complicated commercial real estate transactions. All the analytics in the world can’t replace a handshake and a conversation.
