005-martin-lopez

COMMUNICATION and COLLABORATION

A discussion with Martin Lopez

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https://thecuriositytheory.mykajabi.com/the-curiosity-theory-book

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John Debevoise:Greetings everyone, and welcome to another serving of Business Soup Talk Radio. If it’s in business, it’s Business Soup. I’m your host, John Debevoise. Today we’re going to be talking about the critical element of financing. In particular, lines of credit. For most small business owners it involves security such as your home, and that security is known as a HELOC, which stands for a home equity line of credit. We’re going to be talking with an expert in that field on how and when to use a HELOC in association with your business. My friend Martin Lopez on HELOCs.

John Debevoise:Martin, let’s talk about your background as far as financing. How did you get involved in the mortgage and finance business?

Martin Lopez:I used to be a real estate agent, and when I got married my wife did not want me to work weekends holding open houses and she said, “Is there something else you can do?” And I always helped the loan officers with the financing. I just seem to understand that really well, and so that was just a simple way to change from being a real estate agent to being a loan officer, and I did that about 21 years ago and I haven’t looked back.

John Debevoise:Twenty-one years, so you’ve seen a huge change in the regulations and the methods by which financing is acquired by both the homeowner, the commercial aspects, as well as the subject we’re going to be talking about, and that’s in the HELOC or business aspects of the HELOC.

Martin Lopez:Yeah, I’ve seen a lot of change in the residential. The commercial has been pretty consistent. Commercial loans have had the same underwriting in my experience the whole time. That really wasn’t affected. It was more of the residential real estate, the home equity lines, and the first trust deeds were the ones that were really affected and it was a shake-up, but it was a good shake-up because the way they’re doing loans right now is I think more responsible, making sure that people actually are qualified to be able to borrow money versus if you can fog a mirror, then you get a loan. I don’t think that’s a really great way to be able to buy a house.

John Debevoise:That was an interesting time in that real estate bubble. We’re talking with Martin Lopez and as Martin and I go back to a group that we are involved with, we’re going to be talking about the use and the proper timing of a HELOC. That’s an acronym for home owner line of credit or an LOC, line of credit. Martin, in the world of restaurants, so many people have to use their home as a secondary security, whether it’s perhaps in the lease or in the purchasing of their trade fixtures or just the operations of a business such as a restaurant. When you see a HELOC, what are some of the methods by which people should acquire them and treat them?

Martin Lopez:Well, HELOC is basically a second trust deed. I know that some people try to get HELOCs as a first trust deed, but how you acquire them is basically going to a bank. A lot of credit unions are very, very HELOC friendly. Banks are very HELOC friendly, and how you acquire them is you just qualify just like you’d qualify for any other loan. They’re going to look at your credit, they’re going to look at your income, look at your ability to repay and they’re going to look at your equity. Equity in your property because the HELOC, the home equity line of credit, is typically going to be behind a first trust deed.

Martin Lopez:What that means is that if there was ever a foreclosure, the first trust deed, the original loan that you purchased the house, is going to get paid off first. There’s any money left, it’s going to be used to pay off the HELOC. So you’re typically looking at not as much leniency when it comes to loan-to-value or combined loan-to-value, which is the total amount of loans that you’d have on a property. Give an example. I will use a small number because it’s easy to figure out. Let’s say you had a house that was worth $100,000. You had a first trust deed of $50,000. That means you have 50,000 in equity. Home equity line may allow you to borrow up to 90% of that equity so you can pull out another $40,000.

John Debevoise:A good time to use that home equity line of credit or HELOC for a business is when there’s the opportunity to get a discount on products or services, and as I’ve advised my audience, if you find an opportunity where if you buy at volume, you can buy the product or service and you can roll that or convert that and turn it over within 30 days within the interest period, buy it. Get it now and use your HELOC to do that, and then, what are the payback options? How should someone treat that HELOC with the payments? Let’s talk about the opportunities of the payment options with a HELOC.

Martin Lopez:Well, most home equity lines are interest only, so you’re going to have a smaller payment than if you went out and did a second loan on that property. So let’s say for instance we use the example from before. You pulled out $40,000. If you went and got a regular second, it would be a second which every month you pay principal and interest. With a HELOC, you can pay it back anytime, kind of like a blown up credit card with a higher amount, and like you said if you have an opportunity to buy product and you get that product at a discount then you use your home equity line, and a lot of home equity lines have a credit card that follows along. So you basically use the credit card, the money gets drawn off the home equity line. You’re only being charged for the money you’re using. So let’s say you had $40,000 but you only use $22,000. You’re only getting charged for the $22,000, not the $40,000 available to you.

John Debevoise:And you can pay that amount that you borrowed off at any time or you can carry it over to the next month and continue to pay interest only on the amount of money that you have withdrawn.

Martin Lopez:Correct. You’re typically going to have an interest only period. Typically that’s going to be about 10 years, and then you go into a 10-year option or 5-year option or a 20-year option. Typically how the home equity lines are going to be written.

John Debevoise:Who should the restaurant owner go to to ask for or acquire a HELOC?

Martin Lopez:The first place I would try at a HELOC would be a credit union, and then go to an institutional bank, but I would usually go to a credit union first. I find that they’re going to have better rates.

John Debevoise:The bank you’re doing your banking with, if you’re running your cashflow through a bank, ask them first. They may say, “You know what? We like your business. We’d like to keep your business and make you that HELOC opportunity.”

Martin Lopez:I think so, but the truth of the matter is is that every division is a different division. The people that handle your banking, your deposits and all that are not the same people that handle your home equity lines or your first trust deeds or your commercial loans. A lot of people think, “Hey, I got a relationship with the bank.” That used to be the case. That used to be when you had the small banks and the local banks it was that way. Banks just run differently right now.

Martin Lopez:I can tell you how many times I’ve gotten a call from somebody that says, “I just don’t feel like they really are there for me.” Well, they’re looking at numbers. They’re looking at volume. They’re looking at, do you qualify? Do you have the credit score to qualify? Do you have the equity to qualify, and based on those two things, and do you have the income to pay back? They’re looking at that stuff, and I have not found lately that banks are treating you like you’re their friend. They are into it for themselves and they’re looking after themselves, especially from what happened in this last major recession we had where a lot of banks got in trouble for issuing home equity lines when they shouldn’t have done that.

John Debevoise:Reflecting back on that era, a lot of people converted what was their equity into a debt and they went out and they bought things such as cars or they put in an entertainment center in the backyard, and they took something that was not costing them anything, their equity, and they converted it into a debt and particularly with the fancy cars that they bought, that car wore out and then they found themselves back in the credit market and they didn’t have the equity. They had a payment, and now they had to go out and buy a new car and finance it, so their expenses went up. That was in part what led to the big meltdown in that real estate bubble.

Martin Lopez:Hundred percent. I can’t tell you how many Hummers I saw out there and I imagine a lot of them were financed with a home equity line of credit.

John Debevoise:Absolutely.

Martin Lopez:So that was kind of a joke in our business. You know, there’s a Hummer financed by your house.

John Debevoise:That’s right, and of course back then the tax allowed you to buy something for your business up to $100,000 and write it off in the year of acquisition, and that’s when I saw an explosion of Hummers on the road because they were about a hundred grand at the time.

Martin Lopez:They were. Yeah, there was a lot of nice cars out there and people were using their home to do that. But what a lot of people do, like you were saying, is they use the home equity line to purchase goods for their restaurant, sometimes to even purchase restaurants. I’ve seen that happen and I’ve been a part of that quite a few times.

John Debevoise:As far as my audience, we have what we call the five points here at Business Soup. That’s the idea, the plan, the people, the execution, and the solution. If you’d like your five points to selecting and what questions you should ask before getting a home equity line of credit, well just go to BizSoup.com and you can log in and get your five tips that will be brought to you by our guest Martin Lopez. As to the home equity line of credit and those who qualify and the interest rates that apply, if you own a home and you have reasonable credit, I’m assuming you can get a line of credit or a HELOC. What should they be looking for as to the interest rates that would apply to the HELOC?

Martin Lopez:Well, it’s all risk-based. Just like regular loans are, HELOCs or risk-based as well, and so you’re looking at your interest rate being determined by what your credit score is. They’re going to look at your credit scores. You have three different credit scores. Some banks are going to look at the Beacon, some are going to look at TransUnion, some are going to look at Equifax. They’re going to look at whatever they deem as the most important credit score to look at. I find typically it’s an Equifax score is what they’re looking at and if there’s two people that own the house, they’re going to take usually the highest score which is different than getting a first mortgage, and then they’re going to want to know what your ability to pay that back is. So what is the income you’re getting from your business? They might want to look at some financials and to know that you actually can make the payments on that loan as well as maintain the house and maintain your business.

John Debevoise:Is it typically an acceptable practice that a HELOC is easier to get than the original purchase money trust deed or when you buy a house?

Martin Lopez:Yes, that’s correct. My wife and I, we have a HELOC on our property right now and I think it took us seven or eight days to get. It took us one or two days to get it approved, took about three or four days for them to get the paperwork and we were signing and two or three days after that it was recorded and we had access to it. When it comes to a mortgage, you’re talking appraisals, you’re talking about verifying your income, which requires tax returns, back tax returns, W2s. All this stuff. All your financials. With the home equity line, typically they’re just going to look at your credit and then you tell them what you make and they’ll verify it sometimes and sometimes they won’t verify it.

John Debevoise:Of course what we’re talking about here is the opportunity for restaurant owners to use a HELOC for opportunities, particularly when you are looking at trade fixtures. Those are the items that you use for the purposes of the business. They are not considered to be part of the real estate. They’re usually standalone or they are bolted on, and a trade fixture is something that can be very expensive, particularly if you finance it through the trade fixture outfit or through one of their financing options. If you have a HELOC, you have the opportunity to deal as if you are buying cash. That’s exactly what it is. As our guest Martin Lopez is talking about that oftentimes a credit card, a debit card goes with this line of credit, and you have the opportunity to buy whatever goods and services for cash that would give you a better deal.

Martin Lopez:I like what you said. You have trade fixtures, because what happens a lot of times when restaurant owners are looking to do some tenant improvements or some just improvements, they’ll go to the SBA and they’ll work out a small business loan and that then becomes a loan that is a principle and interest payment that you pay over time, and you don’t have the flexibility. You borrow that money once and you pay that, just like the regular institutional loan. The benefit I think of a HELOC like you’re saying is that you can keep using it over and over. You can use it, pay it off, use it again, pay it off, use it again, pay part of it. You pay interest only payments, so it really has so much flexibility. Because cashflow is always important in this business. We know that, right?

John Debevoise:Cash is king, and always keep earning money and turning the inventory over. It’s of no value if it sits on the shelf, so if you have an opportunity to buy something whether it be a large amount of product to convert into soups or sauces and such, buy it, but I always look at can I convert that inventory over within 30 days? That’s the interest cycle. Can you do that and then repay it, pay it down, and always have it available? Do HELOCs traditionally have any cost of carry if you’re not carrying a loan? Does it cost you money just to have it or to start one?

Martin Lopez:It depends on the institution. Some may charge you $50 a year. Some would be $12 a year. Some will be zero. What they do have is typically if you cancel him, there’s a cancellation fee of anywhere between 150, 200 dollars to 5 or 600 dollars, so typically what people will do is they’ll get a home equity line and just leave it on their house for as long as they leave it on their house. Typically about five or six years is the minimum what you want to keep it on your house.

John Debevoise:We’ve been talking with Martin Lopez about the value of a home equity line of credit. If you’d like more information on what you should do before getting a HELOC or LOC, that home equity line of credit, go to BizSoup.com. That’s B-I-Z-S-O-U-P. Martin, thanks for joining us here on this serving of Business Soup.

Martin Lopez:Thanks for having me.

John Debevoise:This has been another serving of Business Soup, where business comes for business. I’m John Debevoise, inviting you to visit the website for more servings of what is best in business.