"Financial Institutions"
 What Makes Them 'Tick?'

From the desk of Colm Dillon ...   

Financial Institutions is a term used throughout the finance and development industries and embraces all types of lenders.

Most of us think that it only includes banks and finance companies, as these are the ones many of us deal with on a daily basis.

In fact, the term financial institutions is much broader and applies to any business that lends money, such as insurance companies, credit unions, venture capitalists and so on.

If you do a search on Google for the term, you will get over 200 million web page results.

So just like any business, there are small, medium and big lenders in the market, however all of them only have 'One Product' to sell. Indeed, it is the same product in each case - money.

For some reason many of us are apprehensive about dealing with Lenders. I don't know if it is fear of rejection or lack of understanding of the processes, but at the back of our minds we seem to be uncomfortable in our dealings with lenders.

So Let's Break Financial Institutions (Lenders) Down To Size

Do you realize that every financial institution in the world would go broke if? you and I did not borrow money from them ... think about it?

Do you also realize that every financial institution have salesmen/women, who go out every day to achieve sales targets set by their Sales Managers ... that's correct, they have to 'sell' an amount of money per week, month, quarter, year in order to achieve the lenders' profit targets.

Do you realize that every financial institution in the world would go broke if? you and I did not borrow money from them ... think about it?

Do you also realize that every financial institution have salesmen/women, who go out every day to achieve sales targets set by their Sales Managers ... that's correct, they have to 'sell' an amount of money per week, month, quarter, year in order to achieve the lenders' profit targets.

Lenders only have one product to sell. Gee, your local supermarket has maybe 50,000 products to sell. So financial institutions have a very limited 'stock appeal,' don't they?

As a matter of fact, the supermarket is a good analogy to use when discussion financial institutions.

If you only had 'one product' to sell and it was the same product as every other seller (financial institution), how do you think you would distinguish yourself from all the others?

How would you convince people to "Buy My Money" - it's better than the other guys.

Now We Get Into The Financial Institutions" Mumbo Jumbo

It's called 'Packaging.'

Have you ever heard of the Maximizer or the Minimizer; the Home Loan or the Line of Credit; the High Income Professional Loan or the Overdraft? Of course you have.

In fact I don't have enough space, on this endless page, to list them all. But folks, it is just the financial institutions' money with a new package name on it.

Each package uses words to make IT different from the next one.

This is how financial institutions appear to put more products on its supermarket shelf ... and of course each product has a different price; hasn't it?

What Is The Price Of Each Package?

If you are honest in answering that question. most of us would give me a look that indicates you are talking to someone that wasn't very bright and say, "the interest rate. Colm."

And you would be 'half right.'

After all, the interest rate is what is highlighted in every newspaper advert, every bank's window, street hording sign ... 6.78%; 5.99% for the first six months; introductory rate of 4.99% ... you name it, that’s what is what the public sees.

But the other part of the ‘Price’ of the money is not highlighted and has far greater significance.

I am talking about the 'Terms' of the loan. And by that I don't only mean how long the borrowing term is in years. I mean all the terms and conditions that apply to the loan.

So I regard the 'Interest Rate' as being like a diversionary tactic.

It A Number So It's:

Easy to understand;

Easy to compare;

Easy to calculate and;

Easy to convert over to a weekly or monthly amount in out mind.

We can even play 'one-up-man ship' with our friends around the BBQ.

"Oh, I got mine at 6.95%. How did you go Bill? 7.1%, Geese, Bad Luck!

So can we leave the interest rate on the easy side of the explanation sheet and concentrate on the terms of our borrowings ... that is the part that takes a bit of work on our part?

I mean have you seen the pile of papers you have to sign when you take out a loan - daunting; and to many of us, a bit frightening.

To add to our worries, have you noticed that this pile of loan documents always arrive for your signature when you have only a few days to settle the purchase of the property.

So when you add document volume and complexity to the pressure of "only a short time to read and sign," is it any wonder we are apprehensive in our dealings with financial institutions?

Let me say that I have never signed loan documents that I have not read and understood. In addition, when I start reading, I always have a note pad on which I make notes of the essential parts of the loan; a synopsis of the essential points is what I call it.

I always attach that to my copy of the loan documents, so that if any question comes up during the term of the loan, I have a quick reference in my words as to what the loan documents say.

It has never let me down in a long time. Plus I always sleep well when I understand my commitments to a financial institutions are in simple language as opposed to legal jargon.

Now Lets Discuss Risk

You are just like financial institutions when it comes to risk ... they don't like it. In fact, like you, they try to minimize it to the lowest level they can.

They minimize it by transferring as many obligations to you as is reasonable in the loan terms and offset any additional risk by the interest rate they charge.

You see all financial institutions are no more than a well organized 'middle man.' They don't even use their own money, do they?

They borrow from members of the public at say 5% and lend it out at say 7.5%. So the 2.5% difference is to cover profit as well as risk. They just do the lending with Billions of dollars that's all.

OK, with that out of the way, what would be the lowest risk type of loan.

A home loan is as 'Safe As Houses' (sorry for the pun, but where do you think it came from?) so it is money for jam to the financial institutions.

Just think at 10% per annum, they double their money every ten years or at 7% pa the double every 14 years.

To a high earning professional, they offer not just an attractive interest rate, because of the percieved low risk, but also through in a lot of 'Goodies' from insurance to low rate credit cards ... the list is only limited by the imagination of the marketing department of the financial institution.

As the risk profile of the loan and individual borrower increases, so does the interest rate and terms increase in severity.

So if you are the richest person in the world, you get the best terms and conditions. In fact financial institutions fall over themselves to lend you money.

OK, that gives you a view of financial institutions, but as our interest is in real estate development we need to get down to the specifics of financial institutions real estate development financing.

Colm Dillon Signature

Author of "Residential Development Made Easy"

Learn Real Estate Development "The Right Way The First Time" From the Only E-book by $1.2 Billion Master Developer

Colm,

I love the coarse it is exactly what I was looking for God Bless you for taking the time to put it all together. I have been through it once and about to go through it again , again,!

Dave Treasureman - USA