Bob Schultz and Jim Weigel have been through tough housing markets and lived to tell about it. They used to work for banks, doing loan workouts with builders. Now, they’re helping builders renegotiate loans with their lenders. They know that by the time a loan gets to the workout stage, the best case scenario is that both parties will walk away bloodied, but still standing.
“No one will get their money back,” says Schultz, president of the Boca Raton, Fla.–based sales training firm Bob Schultz and the New Home Specialists. “It’s all about minimizing losses.”
Builders can attempt to renegotiate terms with their existing lenders or pursue new sources of financing. In either case, it’s vital to have a business plan that shows the lender why it makes sense for him to stay in the deal, says Weigel, a consultant with Littleton, Colo.–based Lee Evans Group. Offer realistic market projections and project details, including land, lot, and house prices and sales velocity. And be upfront about what you can—or can’t—add to the pot. Lenders will ask for as much cash down and collateral as possible, Weigel says. “If it can be shown there’s little collateral or net worth to get at, they’ll tend to be a little more flexible.”
What they really want to know is how much of their money they can get back and how fast, compared to foreclosing. “If six months and 80 percent is the best they can get, the bank can figure it out,” Weigel says.
But before a builder talks to his banker, he needs to talk to his lawyer and accountant about his legal rights and obligations, how to protect his assets, and whether bankruptcy is the best option available.
Surprisingly, many builders don’t even try to talk to their lenders when they’re faced with foreclosure.
“For some reason, most builders will never do this stuff,” Weigel says. “They think, ‘I’m just going to go to work and do what I do everyday,’ look at the forecasts and say, ‘Oh well, things are going to get better this year,’ and that’s their plan.”
Some builders have better plans. Four of them—two that worked with their banks and two that found private money—shared their strategies with Builder.
Sean Batcheler’s Streamline Homes was doing well in the Palm Beach County and Port St. Lucie, Fla., markets. When the market began to turn, he asked for help.
“We were in one of the biggest-inventory, fastest-declining markets in the country. I got together with [my consultants] and said, ‘I need a plan of attack.’”
The plan was to finish the houses in progress—the majority of Streamline’s portfolio was 65 percent completed—and slash prices to get them sold. To do that, he had to convince his suppliers and trade contractors to take 50 cents on the dollar of what Streamline owed them for work completed. Given the alternative—the loans going into foreclosure, and getting nothing—they agreed.
Batcheler went to his lenders armed with contracts from 110 vendors and trade contractors who agreed to the terms, including a lien waiver for the banks. He had estimated the value of his business to the bank and with the help of Schultz, his sales consultant, had a script for what to say. It went something like this: “I’ve been a good customer for many years. I want to be a good customer again. Are you open to working with me over the next several months?”