Banks calling good loans

[1carwash1]

Beware, get your financial house in order.....
Why would a bank call a current non delinquent loan just because a balloon payment came due? Were hearing stories where banks are pulling the plug on car washes even when an owner has the capability to continue paying as usual, and then putting the same property for sale at a fraction of the outstanding mortgage. Why would a bank call a loan just to turn around and put it back on the market for a lower selling price? It's just heart-wrenching to watch somebody lose everything they've worked so hard for. Who even came up with this idea of a balloon payment or "due upon demand" clause. It's like having a build in bankruptcy clause.

 

[pitzerwm]

This is why IMO you are better off to not be in business than to sign any type of "call" loan. NO one has ever said that the bankers are smart. If they were they would also get into business and take some risk. This isn't the first "crisis" that the banks have screwed over the guy that is making his payments and rewarded the guy that doesn't have a pot to pee in.

 

[Indiana Wash]

I don't know of any banks that want more foreclosed property. I doubt any bank would call a good loan. I do know that some banks change the type of loans they make and therefore, if you have a 5 year balloon, you could be subject to looking elsewhere to get refinanced. That is why it is called a 5 year balloon. To expect that you will be automatically refinanced after your loan ends is unrealistic.

 

[Earl Weiss]

Beware, get your financial house in order.....
Why would a bank call a current non delinquent loan just because a balloon payment came due? .

Your premise contradicts itself. If a loan has a five year ballon, the loan is due after 5 years (It's not "called".). This applies to car washes and other projects as well. If you have to get a loan with a balloon then you need an option to refi at arate like prime plus.

The second faulty part is a "why?" which seems to imply there is discretion involved. These loans are not renewed becuase:
A. The bank needs the capitla and does not have the capital reserve to fund it; or
B. Regulations have chnanged vis a vis loan to value and the loan no longer meets that level; or
C. The value of the collateral has changed so the loan now doesn't meet loan to value criteria.

Sadly, some business mortgage loans have been called due to"C." above.

 

[Classic Car Wash]

Your premise contradicts itself. If a loan has a five year ballon, the loan is due after 5 years (It's not "called".). This applies to car washes and other projects as well. If you have to get a loan with a balloon then you need an option to refi at arate like prime plus.

The second faulty part is a "why?" which seems to imply there is discretion involved. These loans are not renewed becuase:
A. The bank needs the capitla and does not have the capital reserve to fund it; or
B. Regulations have chnanged vis a vis loan to value and the loan no longer meets that level; or
C. The value of the collateral has changed so the loan now doesn't meet loan to value criteria.

Sadly, some business mortgage loans have been called due to"C." above.

Last year my bank offered me a deal on my home that sounded too good to be true. They offered to put me in a non adjustable 15yr mortgage at a low low rate 0f 3.75%. I said, "where do I sign"! My payment went up a few hundred but the principal is going to come down fast.

Fast forward to a year later. As the economy continues to tank money is not flowing at my level like it use to so I end up back at the bank seeing about getting back into the 30 or even a 40. I need to get the payment down.

After reviewing my particulars, I don't own enough of my home to refi. My home is loosing value faster than I can pay on it. I'm throwing somewhere around $1000 a month right down the drain. Hmm, go figure. The Banks knew this was coming. They set me up to take the hit. That's what they do. Their money is insured yet they would rather see us loose. Makes no sense.

Luckily the Car wash only has a small loan. No where near actual value but the bank is trying to get my partner to put it up for another piece of property. I don't like it.

 

[pitzerwm]

Never get into your head that the banker is your friend.

 

[Randy]

A couple of car washes here have gone back to the bank. After the lending institution went under the lending institution that took over the loans reevaluated the car wash loans and determined that they didn’t fix there program, called in the loans. The car wash owners couldn’t get financing so the car washes went back to bank. One of the car washes, the owner had been paying on it for almost 10 years. Today it’s an empty shell with a temporary fence around it.

 

[1carwash1]

I think many investors were led to believe that if they were current on their loans they would be renewed, and for awhile it seemed to play out that way.
The point of this topic was to make people aware that banks will not necessarily renew their loans based on a timely payment history. If you have one of these loans reaching or near maturity it might be advantageous to have a sit down with your banker and discuss options, far in advance. Facing a thirty day "demand" may not afford you enough time to find alternate solutions.

 

[Earl Weiss]

1. I'm throwing somewhere around $1000 a month right down the drain. Hmm, go figure.

2. The Banks knew this was coming. QUOTE]


1. How much would you be throwing down the drain if you were renting? If you sold aand bought something else?

2. IMNSHO this assumes the banks are smarter than most everyone else. I think history establishes the contrary.

 

[Earl Weiss]

Never get into your head that the banker is your friend.

Even if the Banker is truly your friend, and you have a friendly deal. It makes no difference if the bank is sold. The new owners don't care. ()Had this happenm to a couple of clients. One "Friend" even ended up in Jail.)

Worse yet, if the FDIC takes over they can "Repudiate" all sorts of stuff. HAd this happen to a Bank I dealt with and the FDIC / successor bank repudiated a letter of credit I had up. Luckily the new bank wanted the business but I had t scramble to get the application process done.

 

[Classic Car Wash]

1. I'm throwing somewhere around $1000 a month right down the drain. Hmm, go figure.

2. The Banks knew this was coming. QUOTE]


1. How much would you be throwing down the drain if you were renting? If you sold aand bought something else?

2. IMNSHO this assumes the banks are smarter than most everyone else. I think history establishes the contrary.

1. Nothing. I could prolly rent for cost of the interest and tax. The $1g a month could be going in my pocket or savings.

2. Your 100% right. They fudged up now we are paying for it.

RL

 

[robert roman]

Regardless of terms and conditions, when the loan was originated, the borrower had to meet certain criteria to qualify such as personal net worth, credit score, loan-to-value, collateral, etc.

A loan that is structured or amortized with a balloon payment has more risk for both the borrower and lender than a loan with no balloon payment.

The bank covers its risk by holding the borrowers feet to the fire in terms being able to meet the lending criteria established when the loan was originated.

The borrower has to cover this risk as well as competitive risk and operations risk.

So, it doesn’t matter whether a borrower can drum up enough cash each month to continue making the mortgage payment.

If the business isn’t throwing off enough cash (sufficient gross sales) and/or the borrower can no longer meet loan criteria, the bank will want out when the balloon matures.

There is no “it’s not fair” in the carwash industry.

 

[rph9168]

In the past balloon loans were fairly common in our industry. It was a good way to get into the business as long as the business grew and the economy grew or at least remained stable. Many owners that I knew generally refinanced at least a year before the balloon was up depending on interest rates and usually had no problem doing so since the wash normally was showing a decent profit, the property value had increased and their financials were in order.

Unfortunately we have experienced some tough times over the past several years. Decreases in revenues coupled with the decline of the real estate market has made it difficult to refinance unless one is able to do more than simply depend on the value of the business and the property. In addition banks have tightened requirements and in some cases will not even consider a loan on a car wash unless there is considerable equity on the property excluding the business.

 

[robert roman]

“In the past balloon loans were fairly common in our industry. It was a good way to get into the business….”

Let’s say a balloon is a way to get into the carwash business but not necessarily a good one.

During the end of the last carwash boom period, I prepared a lot of feasibility studies for banks making carwash loans.

Some of the low-yield projects like self-service start-ups were financed based on pro forma showing net return as low as 8 or 9 percent.

“Unfortunately we have experienced some tough times over the past several years. Decreases in revenues coupled with the decline of the real estate market has made it difficult to refinance unless one is able to do more than simply depend on the value of the business and the property.”

There is the rub.

1) It was unrealistic for developers to believe the hype about the carwash industry being recession proof

2) It was unrealistic for developers to rely on more than simply the value of the business and property

3) It was unrealistic for developers to build in areas with marginal rather than excellent market opportunity and to expect above average performance with inexperienced management

“In addition banks have tightened requirements and in some cases will not even consider a loan on a car wash unless there is considerable equity on the property excluding the business.”

This is as it should be and anything less today would be foolhardy. Banks will change when the business cycle changes.

Some banks have already lightened up because things have improved in certain markets. In some areas of the country things are going along pretty well. Pittsburgh, Pa. for many reasons is now ranked as one of top retail markets in the country. Need a job, go to Pittsburgh, the want ads are full of job openings.

Think about it though. If you had to do it all over again, wouldn’t you be able to sleep better at night with a mortgage payment based on 50 percent equity rather than 25 percent?

50 percent equates to having a lot more cash going in but it does result in a lot less risk for the owner to cover.

In certain markets, I believe a lower return on investment based on 50 percent equity is actually a more realistic expectation of the commercial carwash industry today.

Consequently, low-yield business like self-service wands makes less sense. What makes sense today is a self-service that generates a much higher average ticket.

 

[rph9168]

I would basically agree with Robert's analysis except for the frequent use of balloons in the 80's and 90's. It was a good way to get into the business back then. Usually things were going so well conversions to more conventional financing methods were done long before the balloon payment was due. In today's market it would probably be almost impossible to get a balloon loan for a car wash even if you really wanted one.

Most banks, especially the larger ones, have been reluctant to loan money for car washes before this recent decline occurred. In the mid 90's I worked for an operator that owned four tunnel washes outright. His own bank, which was part of a large chain, wanted 50% down on another wash he was going to buy. They told him that they had received instructions that recommended that they not loan any money for a car wash and 50% was the best they could offer at that time because he was such a good customer.

 

[pitzerwm]

From time to time, someone or a computer says that a certain type of loan isn't wanted anymore. If you happen to be in the middle when one of these decisions are made, you can have a problem. In 80-81 my bank cut off car wash loans, but because they wanted my business, they changed the loan to a personal loan.

 

[Kevin Reilly]

It's interesting to me that loans were out there with balloon payments. I've been in the car wash business for going on 47 years and I am certainly not rich, but during our growth I never received a loan with a balloon. Over that period of time I've been offered various types of notes but my choice was "locked rate over a specified period of time"!

We always purchased the ground along with it which gave the banks some leverage by holding the deed to the property and we were/are considered seasoned operators.

It is a sad state when things like this can happen to someone who's busting his butt to keep his business going, making his payments and then gets a "call" on his balloon and will not rewrite it.

 

[2Biz]

4-5 years ago my wife and I got into the financial market, me part time, my wife full time. We had various licenses, Securities, Insurance, Long Term Care, and could refinance loans...We did several hundred Financial Needs Analysis for homeowners and business owners before the bottom dropped out of the market.

It was very interesting the FNA's we did where the homeowner had a ballon and didn't even know it. It was also amazing how much denial they were in once it was pointed out to them. "Can't be! You don't know what your talking about! My loan is so good and CHEAP that it can't be beaten!" Its amazing that most of them had to stay in that loan because they no longer qualified for anything else. Maybe they were late on a payment or just couldn't afford a better loan...

If we got nothing else from all this, we was able to help and teach some people that wanted to listen and learn. Plus what we learned ourselves will help us make better decisions, financially, of our own...

When getting a loan...Do the math. Check every page. Make sure its a fixed rate for a pre set amount of time. Then there will never be any surprises...

 

[rph9168]

Technically the banks are not calling in a balloon loan. The term of the loan is over and the principal is now due. There is normally not any agreement about extending the loan or renewing it. The problem is that people that get caught up in many of these loans are only thinking of what their payment will be rather than terms of the loan.

I had a friend buy a car recently. He told me what the payment was and I asked him the length of the term. He did not even know how long the loan was for. I have a feeling that there are alot of people out there in the same boat on business loans that don't realize this until it is too late.

 

[Earl Weiss]

It was very interesting the FNA's we did where the homeowner had a ballon and didn't even know it. It was also amazing how much denial they were in once it was pointed out to them. "Can't be! You don't know what your talking about! QUOTE]



I thought you couldn't issue a balloon note for owner occupied single family residence. Adjustable yes. Balloon? No.