You need to proactively check off as many boxes as possible to alleviate the lender's concerns
Need To Know
Acquiring agency debt (Fannie Mae and Freddie Mac) requires some real estate investment experience
Understand what qualifications Fannie and Freddie require in order to get ahead of them
Don’t give up if rejected!
I received an ~$4 million Fannie Mae small balance loan in 2018 for a 63 unit apartment portfolio. The only real estate investment experience I had previously was owning a 6 unit apartment building since 2015.
So how did I qualify for a Fannie Mae loan that was going to 10X the number of units I owned previously?
Typical Borrower Requirements
Fannie and Freddie have some boilerplate requirements for a borrower. The borrower requirements are generally the following (I may not have captured everything and things may have changed recently) for a Fannie Mae loan as that is where I have direct experience:
Borrower(s) net worth must be equal to or greater than loan amount
Borrower(s) must have liquidity post closing of 9 months debt service (or 10% of loan amount for loan >$6MM)
Borrower(s) must have credit score 680+
Borrower(s) must be an experienced multi-family property owner (What does that mean?)
I was able to cover the 1-3 objective requirements. But 4 was an issue with the lender. So how did I overcome this more subjective borrower underwriting requirement?
Find A Partner With Adequate RE Experience
I found a partner with more real estate experience that was willing to be a co-GP and sign as a guarantor for the loan. This was obviously the biggest reason why I was able to overcome the experience concern from the lender.
So how did I find this partner? This person was a former boss that I had continued to stay connected to. His family had significant real estate holdings and his experience easily met the subjective "experienced" requirement. And because we had stayed close over the years, he did not make any additional demands for equity as a co-GP.
Moral of the story: Never burn a bridge when you leave a company and make an effort to stay connected.
What Else Did I Do?
There were several other items that helped me reduce concerns on my ability to effectively operate the property:
I established credibility and a relationship with the loan officer to help alleviate any concerns he may have had with presenting my deal to the underwriters. I did this simply through having phone and email conversations. I did not meet him in-person until well after we had closed. I also made it a point to make sure he was aware of my plans for future growth (i.e. potential future business for him) by providing him my real estate business plan.
This was a very small market, so there were concerns regarding the market itself and then layering my relatively minimal experience complicated matters. However, the 6 units I already owned were only 15 minutes away from the 63 I was acquiring. I was able to show with real data that I was capable of operating a profitable building in this area along with having an intimate knowledge of what market rents were and historic vacancy rates.
I had decades long connections in the area. I had lived in this market as a kid and still had family in the area. Key vendors were going to be close family members.
I acted like a professional real estate investor. I had done my homework on how some of the bigger apartment syndicators/investors operated, so I modeled everything as if I was bigger than I really was. I wrote a business plan for real estate investing, I created professional looking templates for underwriting, I re-formatted any seller documentation that wasn't professional looking. This wasn't done to try to fool anyone - it was done to show a high level of professionalism and understanding of the industry to the lender.
I was incredibly responsive whenever the loan officer or underwriters requested information and I spoon fed the information in the exact format they requested. I wanted to remove any roadblock regarding being difficult to work with and make their job as easy as possible.
I had some luck. Borrowing in 2018 was good timing. If I had tried to borrow in May of 2020, I highly doubt I would have been approved due to the tighter lending criteria the agency lenders implemented.
Initially Rejected For An Agency Loan
I first inquired with a Freddie Mac lender regarding this 63 unit property. After an initial evaluation, the feedback was the property wasn't a good fit given the very small market and the exceptions it would require (private water and sewer, distance between properties, etc.).
Given my ignorance of the process, I assumed because an agency lender rejected the deal, every lender would reject the deal. This was a terrible assumption. The agency lenders clearly have certain criteria that must be met, but they clearly all do not underwrite exactly the same and have different appetites for signing up for the work required to get exceptions approved.
What Did I Learn?
Be persistent! Put in the work to find a lender that is willing to go to bat for you to close your deal.