Earlier this year, my parents went house hunting for a quiet place to retire, away from the big city. On the edge of the most remote desert in the lower 48, in Escalante UT (population 850), the perfect choice was an old 1940s house that had been abandoned for who-knows-how-long.
My parents started the loan process, and the bank was enthusiastic at first. My parents had a 50% down payment, good credit scores, and good cash flow. My father was also a builder and already had a lot of the materials. On top of that, the property was 1.5 acres, came with 2 water shares (worth $7000 each) and a large cinderblock building (worth $15000).
But this house was a serious fixer-upper.
In fact, the more the bank looked into, the more they didn’t like it.
First off, the house looked like it had been the sport of a few drive-by shootings. Or the remains of world-war II.
Second, the house was remote – hours away from any town with more than one cop. Heck, the post-office was for sale. (Banks like their fingers in the closest, tastiest pies)
Third, the local economy (like most) was standing in the real-estate dark ages.
But, what I think the bank disliked most about the house (and we found this out later) was the fact that bees filled the walls with honeycombs, or that bats and wasps made their home in the attic, or that years of accumulated finch corpses were layered in the furnace.
The Bank Doesn’t Care About What It Doesn’t Know
Despite honey dripping from the house’s electrical box, my Dad knew the bones of the house were solid (in fact, more structurally sound then most modern houses). But, the city-slicker banker in his suit and tie didn’t know this. Neither did the appraiser. In fact, the appraiser factored in the cinderblock building and water shares at $0 because they were “agricultural” and apparently worth nothing. Sure, maybe it wouldn’t help sell a summer condo at the beach. But in a farming community? Really?
Stacks of paperwork filled out, contracts signed, and three months of waiting, the bank turned down the loan. My parents had invested a lot of energy for nothing.
In my mind, there are two things you, as a business owner, can learn from this story:
First, before getting a loan, you may have to iron out a few wrinkles in your business story. This might mean explaining to the banker a major spending decision in the past or proving that an unconventional idea will succeed in the future. Whatever it is, be sure to especially discover your business’ “bees in the walls” before the bank does. This could include anything from a bad customer review on Google search results to a picture of you on Facebook drinking yourself sick at a Christmas party years ago. The banker will undoubtedly discover this, and he/she won’t like it.
Second, go to the right bank from the start. The sad truth of the loan process is that sometimes you spend all your time and energy trying to convince the wrong bank. However, while one bank may not want to fund your business, chances are another one will. Had my parents known the bank wouldn’t value the “agricultural units” for the house in Escalante, they would have sought out another bank that knew the area. Similarly, in business, it’s important to go to a lender that knows how your industry works so they can deliver a fitting loan product.
As a last word of advice, don’t do what I did. My parents planned for me to take over the house until they could retire in ten years. Overly excited, I moved to a neighboring house as soon as the bank approved the application. It didn’t even cross my mind that the loan might not go through. Similarly, some business owners are over-optimistic and even reckless at the first sign of possible money.
What about you?
What’s your experience with the loan process? What sort of “bees in the walls” have you encountered in your business?