Tips to make your lender happy....insurance and payroll.  To continue with the information you need to send your lender to refinance or acquire a multifamily property I wanted to talk about two big ticket items on the operating statements:  insurance and payroll.

Insurance

Whether buying or refinancing a property the lender is going to look at the cost of hazard insurance for the previous three years.  Take a close look at those numbers before you send the information to the lender.  If you think the number is too high go out and get a bid from another insurance company and send it along.  Most lenders will underwrite to the new bid when it is lower than the previous costs.  This is particularly important with acquisitions where the previous owner of the property may not have the best insurance rates. 

Payroll

Payroll is always a sticky line item.  From a lender's perspective the best operating statements separate out the cost of full time employees, temporary employees,  employment taxes,  and benefits.  One property I looked at recently had a lump sum number in for payroll.  There was a $10,000 jump in the line item last year which if carried over to my numbers had a direct impact on the net operating income and  lowered the proposed loan amount by $124,000.   Once we started investigating the increase we learned that the property hired temporary labor the previous summer to complete  capital improvements.   Since this capital improvement was a one-time expense I was able to leave it out of my numbers.  Most likely, your lender would  not include it in their estimate of your annual expenses either.  On an acquisition, when you send your pro-forma budget to the lender tell them what employees are covered in the payroll expense.  This is particularly important if there is a big discrepancy between the historical numbers from the seller and your pro-forma.  We often see large payroll numbers for family owned properties that don't carry over when they sell the property. 

Remember, the underwriter has no incentive to be your advocate.  He/she can not go to loan committee and say I used a lower expense number because the nice guy on the phone told me he is certain those expenses are too high.  The underwriter  needs to be able to go to loan committee  and say I used a lower insurance premium in my underwriting because the borrower switched insurance carriers and was able to get the same coverage for $8,000 less per year and we have the bill to prove it.

Next up...real estate taxes and utility bills

Holly Bray - 202-887-1849

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