The 7 habits of a high volume broker office
The 4th habit
Are you “really” screening the buyers?
By Stephen Mariani
Buyers are liars, as the saying goes, what can you do about it?
Almost every buyer calling you inquiring about a listing typically tells you they have no problem with the down payment and securing financing or claim to be paying all cash for the business. Well, as we have all witnessed over the years, they are not always forthcoming. I’m sure we all have stories to tell about wasting weeks and even months with buyers that cannot really secure the funds required and as they move through the transaction it becomes apparent. Here is how it typically plays out and then we will address how to bring this issue to a minimum or even stop this from happening completely.
- You request a buyer’s financial statement on either your company forms or an official SBA 413 (PFS) form to evaluate this person. It appears to show the funds required either in their retirement accounts and/or their bank accounts as cash on hand. They tell you they have great credit and are ready to go. Have you ever thought, after reviewing all their personal provided information, that something just doesn’t make sense? This buyer shows 150M in the bank but you notice that they have almost 50 or 60M in credit card debt? Or maybe a 2nd and/or 3rd lien on their home? If it causes you to question the validity of their personal information what would be your next step? Would you request actual account statements and chance putting the buyer in a defensive mode from the very beginning? Most intermediaries try not to take on that responsibility and we see the majority just moving forward and presenting this buyers offer to the seller.
- Buyer requires financing and his resume’ seems very weak. If you know the buyer is going to be applying for any type of financing then you will know his resume’ will be considered. What we see most times is that the seller had no experience when he entered this industry so we don’t feel like the buyer needs “direct industry experience”. The aggressive lending institutions of today may not be of the same mindset and again, this may not come out for weeks after the accepted offer. Most brokers will not advise a buyer about the resume’ requirements because each lender has specific criteria.
- Does the buyer really have an 800 credit score as they claim? We cannot tell you how many times we see an 800 credit score really show up as a 630 or 650. For those not familiar with credit score requirements or grading, an 800 is excellent and a 630 is very low for any financing request at all. When a buyer says their score is 800 and we find a 630 it causes us to dig into the reasons and ask questions to better understand why it is so low. We will require documentation and written explanations on each and every derogatory item prior to exposing this buyer to any lender. These answers and details are what we use to determine if these derogatory items will stop an application or help us figure how to present them. Many times this is a job in itself.
So, how do we handle the above? I will start with a true story of a borrower that knew he had 32M in credit card debt. He had a great resume and the business was a perfect fit for him. It all sounded great and we proceeded to process his request and application. Our mistake was not confirming his credit and pulling his report. What we later found was and additional 40M in credit cards that he was not aware of. By going through his credit report with him we determined that his wife had opened additional cards and included his name on them. Bottom line was that this transaction could not happen with his now, 65m of credit card debt and lower credit score. We haven’t made that mistake again.
Like so many things today, the true solution is to outsource it. Most of the high volume broker offices that we work with go right to a lender pre-qualification request if there is a good chance financing for the deal will be required. In our shop to secure a pre-qual letter we demand four items from the potential borrower, 1) Their completed PFS 2) Their credit authorization 3) Their actual current bank statements showing every dollar required for a down payment and lastly, 4) Their resume’ for review. Missing any one of these four items will cause us to instantly stop considering the file for financing. What we hear all the time is that Mom is “gifting” me the money or my friend will be an investor, yadda, yadda, yadda. We don’t consider any funds of any kind if not shown to us in a bank account. We will even go as far as having the conversation with the investor upfront to be certain that they will remain in the deal until closing. Our opinion is that if we are putting our reputation on the line and confirming this borrower’s ability to secure financing then we will have everything required in their file. It’s easy for us to ask and may not be so easy for the transaction intermediary to ask. Whether it is a Diamond Pre-qual or any other lenders pre-qual, demand a buyer pre-qual from every buyer you come in contact with. We NEVER charge for a pre-qual letter and no other lender should either.
Considering the market conditions and being a bit of a “sellers” market right now, presenting a buyer pre-qual letter along with their offer not only provides a level of credibility but also sets you apart from other brokers in the seller’s eyes.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.