Additionally, in the event you fail to create the cash circulation necessary to pay back the loan, it is the responsibility of the US taxpayer to guarantee the loan ultimately. Of course, hopefully the lender has made enough good loans to compensate for your bad one. But if the banks are poor stewards of their depositors’ money and enough of their loans go south, it will ultimately be the taxpayer through various governmental agencies like the FDIC that will bail them out.
You would think this would humble you enough to make extra sure that you would be able to pay back the loan. That you would do everything in your power to eliminate all the risks and uncertainties in the business you’re going to attempt. That you’ll run projections, research the market, take a look at your competitors and have the most comprehensive and thorough business plan possible all in an attempt to be sure you could pay back the loan. 15 million of other people’s money, you’ll make sure that you could sell those homes and pay them back the first place.
It was middle 2005 and my manager arrived to my office and put a document on my desk. It was that loan we had done because of this real estate designer about a 12 months ago and not just do he wants to refinance the initial loan but take out a new one for a fresh development he was proposing.
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The original loan was for a 36-device town home development in a little suburb of Mankato. The brand-new loan was for a 120-device development in a much smaller town called St. Peter. I immediately knew something was amiss for while I had developed heard of Mankato I put never heard of the town of St. Peter. Mankato was a sizeable town of 50,000 people, whereas (upon some research) I then found out that St. Peter was a town of only about 3,000 people.
Now basic 3rd-quality mathematics would tell you something was wrong. For each town home would house roughly 3 to 4 people. This guy wanted to build 200 of these, recommending a 700-person increase in population approximately. This implied that St. Peter’s populace was going to grow by 23% in just one year.
“Never to worry,” I had been told. This builder was the 8th largest real property creator in the state with over 20 years experience. 30 million in net worth and may easily guarantee the loan. So it might take a little while longer to market those town homes than previously expected. He could afford it! A year later, his company had opted under and both developments had cumulatively sold a paltry 11 town homes. The banks had taken a large strike and he was no longer the 8th largest real property programmer in the condition. A season later The same story repeated itself.
This time I was driving to the city of Wyoming, Minnesota to perform a site visit on another (you guessed it) town-home development. The creator was nowhere close to as aggressive as the now defunct 8th largest real property designer in the condition building only 12 systems in the city of 3,900 people. This seemed more reasonable, but for some reason his town homes weren’t selling either.
We spent another hour traveling around Wyoming where I counted no less than 400 completely new town homes, twin homes and single family homes being built by various programmers. Quite simply, real estate designers as a group were expecting the town to develop by roughly 38% in one year. Of course nobody was expecting Wyoming’s populace to explode by 38% in one year. Nobody did their homework. How stupid these real property developers had to have been to not bother to at least calculate the demand for casing in these areas is beyond me.
To not even bother to see how many other advancements in the region were being planned or were under the structure to measure the level of supply. And to have the hubris and arrogance to go and ask for millions and millions of dollars of other peoples’ money to develop something they literally got no idea whether it could sell or not was bordering on criminal negligence. As much as I wished to believe it was relegated to just these two developers, I have been in the business long enough to learn this was typical. For in two short months just, the same situation again repeated itself. 6 million loan to construct (what else?) town homes.