SBA Loans for Property Managers: What You Need to Know with Jordan Coleman | Peter Lohmann’s Podcast

you know, do a little bit of homework before you go to the bank. You know, ask questions that you kind of have the answers for. Do they understand SBA? Are they a preferred lender? If not, ask questions of, well, how many SBA loans have you done? Have you done business loans before? And ask, well, what's the equity injection requirement? What's the collateral requirement? And kind of see what their responses are, because that's going to give you an indication of, do they really understand what they're talking about when it comes to a true property management business loan, and then ask how they service their loan. You know, what are, what's gonna happen after your loan closes? Is it you've got this 1-800 number when you've got questions or wanna do a loan modification and you can't find anyone that you wanna talk to and your lender has changed 25 different times from the start to finish. So understand what, what does the process look like? What does the timing look like? And are, are they qualified as a lender to give you an SBA business loan for property management?

Friends, welcome back to Peter Lohmann's podcast. I'm so excited today to introduce Jordan Coleman, loan officer with Live Oak Bank. Jordan, thanks for joining me today.

Yeah, absolutely. Thank you so much for inviting me and having me on your podcast.

Yeah, I'm really excited to introduce Live Oak to my audience. You know, you guys have a unique offering for our industry, which is that you help facilitate loans for property management companies who are looking to buy other management companies or books of business. You also provide working capital in some cases. We're going to dive into all that because I think it's super valuable for my audience, but I want to start by just having you take like 2 minutes or so, introduce yourself, give us a little bit of background on how you got to your current role at Live Oak.

Yeah, yeah, absolutely. So I've been with Live Oak for a little over 9 years now and started just as what we call a loan closing specialist at Live Oak, which is kind of on the back end of the closing. They're the individuals that kind of help you really get to the closing table and, and signing the documents. Did that for about 4 years and then started going into the lending role over here at Live Oak Bank. So we're headquartered in Wilmington, North Carolina. I was born and raised after college, just came back and Live Oak's a, a great place to work for. And they've got an extremely unique strategy, the way that they look at industries and they, the way that they look at their lending process and their loan cycle process. And I just found that extremely unique and wanted to learn a lot more about the lending side of things and property management and That's really how I became the lender at Live Oak Bank for property management companies and businesses.

Okay, got it. So, you know, Live Oak Bank, like many banks, you know, specializes in different sectors and property management is just one of the many different industries that Live Oak operates in. Is that right?

Yeah. So, you know, when you think about a typical local bank that you go down the street to, you think they're geographically located, they're going to kind of serve your area, they're going to serve your market. They're also going to give you a HELOC, a personal loan, a car loan, potentially a business loan. But the question is, do they really understand what you're looking for? Can they tailor, you know, financing options for what you're doing? And we've kind of changed the model here at Live Oak to where we're not geographically located. While we do like to go visit all of our borrowers across the state, as many as we can, or country, we are industry-focused. So we build out true teams, and that goes from your loan officer to your underwriter to your loan closing specialist, even to our credit team that specializes in specific industries.

And that is so smart. Yeah, I love that because the industry can then get to know those folks. And we have other banks that operate in the property management world where people really do get to know those people personally and they know their name. And I think that's a great model. Now, is Live Oak You guys will do loans in all 50 states, is that right?

That's correct. Yep.

Okay. Got it. It seems to me that the property management focus for Live Oak is relatively new. Is that right?

Yeah. So it's one of our newer industries at the bank. I say newer. We've been doing it about 2 years now. Yeah, but it is our newer industry within the bank. But it's, you know, we do it so we can meet people like yourselves in the industry, and we really understand how the business runs and what the door count means. And you know what, where you're buying is going to dictate potentially what the purchase price is. Some rents are going to be lower in different markets, even though it might have a higher door count. So it just helps us to meet people like you and understand the industry for a smooth transaction on how we analyze and viewpoint acquisitions.

Okay. Yeah, that makes sense. But Live Oak, I knew of Live Oak prior to your entry into the industry a couple years ago from listening to small business podcasts and actually hearing Live Oak advertise. And I would listen to interviews with a couple folks that worked at Live Oak primarily around the SBA loan products. Isn't Live Oak like the number one SBA lender in the country or something like that overall?

Yeah, so probably about 3 or 4 years now. We, you know, a lot of people hear SBA and cringe a little bit because, you know, it's SBA-backed, it's government-backed, but we are a preferred lender. And what that means is even though we are utilizing an SBA product, we are able to do everything in-house. So we make decisions, we underwrite, we service and do everything on behalf of the SBA and That allows the property management industry and buyers and even sellers a longer loan term, less equity injection. You don't have to go get a HELOC on your home to try to do this. We can really tailor those options on the SBA product and cut out the SBA. So timing between SBA and conventional is gonna be close to the same other than there are guidelines and rules that we abide by because of SBA.

Yeah. We attempted to get an SBA loan years ago. This is probably 6 or 7 years ago to buy another PM business. And we went through a bank that we've worked with a lot before that didn't have a lot of experience with SBA loans, but we didn't know that. And so the process was horrible and we actually didn't even end up getting the loan in the end and had to use other methods to to buy the company. And then I found out later that one of the most important things you need to ask when you're going to get an SBA loan is ask the bank, hey, how many SBA loans have you done in the last 12 months? And what's like the pull-through rate? Like how many of them actually closed? I think that would've saved me a lot of trouble had I known that. And if also, if I would've known that, I would've gone to a bank that specializes in SBA loans because they're obviously going to be a lot more efficient. They understand exactly what they need to ask for. The first time and just going to be able to be much more informative through the whole process. So yeah, I was going to do that again. I would definitely be talking to you guys or somebody who specializes in SBA lending and it'd be a lot less pain-inducing.

Yeah, I mean, just like a bank is kind of qualifying a buyer, qualify your bank, you know, ask questions and make sure that they know what they're talking about, that they can, you know, again, cater everything to what you're looking for. And you like the answers. You know, we, we want to be as transparent as possible. And even if you don't like to hear something that we've got to say, we're going to tell you on the front end, you know, these are kind of the rules and the regulations and what we're going to be underwriting to because it is an SBA product and make sure that you're comfortable with your lender and they know what they're talking about because like you said, it's, it's either going to go through or not. And if you don't feel comfortable as a buyer and it's not, it's getting a little bit squirrely for you, it's probably not going to work out at the end, unfortunately.

Yeah. Okay, great. So let's zoom in a little bit. I want to hear about, you know, what are the products that you have for property management business owners? Let's start there and then we'll kind of zoom in on, on a couple of these.

Yeah. So we've got a couple different products that we utilize. All of these are SBA loan products, but we do have what you call a Live Oak Bank Express product. Which is for loans $350,000 or less. And that can be for working capital, that can be for refinancing existing business debt, that can be for business acquisitions. It just, it's a little bit of a less due diligence for this $350K and under. And you could probably, especially on a working capital loan, could close probably within 2 weeks of the application being submitted all the way to closing. And then we've got your SBA 7(a) loan product, which is going to be anything really over $350,000 or more. And that's acquisitions, working capital. We do have lines of credit. We can look at doing rent roll replacements. If you wanted to buy a piece of commercial property to operate and get rid of your leased location and have an asset that you own, could look at doing a commercial real estate purchase and you're qualifying for a 25-year loan term. Potentially 100% financing. So definitely different options on what you're looking for and what that can be.

Okay, awesome. And, you know, the one that I find most interesting would be, you know, a loan for an acquisition of a management company. And I think that's probably what a lot of people are, you know, going to be looking at. The need for working capital, at least in my experience, just doesn't come up that much in property management. If you find yourself needing working capital, I sort of wonder what's, you know, what's going on there because property management's a pretty cash flowy business and you really shouldn't be out over your skis in that way. Yeah. Unless there's something really unexpected going on. So for, you know, an acquisition loan, what do you need to qualify? Like, can anyone get this kind of a loan who, you know, hey, I'm looking to buy a management company. Great, you're qualified. I assume it's not that simple, but what, what all are you looking at?

Yeah. So we're gonna look at two separate lenses here. One is going to be the buyer. The other is going to be the seller. So on the buyer side, you know, one, we wanna make sure you're qualified as a buyer. Do you understand the industry? Is this your first acquisition? Is this your second, third, fourth? Are you kind of expanding? So do you, can you run the business and do you understand the industry as a whole? If you're looking like yourself where you're acquiring other property management companies to kind of roll them up underneath, Well, you're, you're kind of already checking that box. You've got an existing operation that we will look at cash flow, make sure it's performing, but you're, you're qualified from a property management, just very high-level overview in that aspect of things. It's a little bit of a different toll if you're a first-time buyer in the property management space. Questions go to, you know, let's dig into your resume a little bit more. Let's understand your background a little bit more. Just because—

Yeah. So this, this would be like someone who is, you know, has some W-2 job.

Yes.

And this is a common path these days and they want to own a small business. And instead of building a property management company from scratch, they want to buy one to kind of jumpstart that process. But they don't have property management experience.

Yeah, that. And they say, you know, I flipped a couple of houses. Well, you know, that's, that's wonderful. But do you have, you know, do you have any—

That's wonderful.

Yeah, that's great. But do you have any idea how to— I mean, there's a lot that goes into property management. You've got a ton of systems in places, you've got a ton of procedures, you've got a ton of staffing and employee responsibilities. Do you really know how to run a property management company? We also see a lot where people are, you know, let's say New York City and they want to buy a business out in California. Well, we're not going to get comfortable with that. We, you know, we want you to be the man running the day-to-day operations. This is not a passive type business. Now, again, if you're getting into your fourth, fifth, and sixth business, it's a little bit of a different scale of what you're doing. But it's, it's really the buyer on are they truly qualified to run this type of business? If not, then it's, it's probably not gonna be something we can get comfortable with.

Okay. So the buyer, and I wanna come back to the seller, 'cause this is fascinating how you're sort of looking at both sides of it.

Yeah.

But on the buyer side, it sounds like A big part of this is kind of like a soft analysis. You're not, it sounds like you're not necessarily looking at credit score or income. It's much more like, tell me about who you are. Tell me about your experience. Tell me about, you know, where are you going to be living in proximity to this business? Or do you have other jobs or other businesses that would take your focus away? Like that kind of thing?

Yeah. So that's, that's kind of checkpoint one for a buyer. Are you qualified to run this business?

Okay.

What's your background? What's your resume? Again, are you flipping homes? We're just not really eye to eye on a property management company. The second thing is what's your personal debt? You know, do you have a ton of personal debt where you're kind of racking up credit cards and you're putting, you know, whatever you want, you have 4 auto vehicles that really just don't make sense for your lifestyle. So we will look at credit and make sure that credit is compatible with our underwriting requirements. You don't have a ton of personal debt. And then if you do have an existing property management company, we will look and analyze that business as well, because that's going to show us and demonstrate how you're operating your existing business, what that's going to mirror and look like for another acquisition as you kind of roll this under existing operations. So there's about 3 different placeholders that we really want to look for in a buyer. Your, your background, are you qualified? Do you have the licensing to operate the business? Are you relying on other individuals, your personal credit and personal debt perspective? And then do you have a property management company and, and what does the cash flow and trends of that business look like? Are you losing doors? Has margins and revenue gone down in the past 3 years? If so, that's, that's a red flag. We need to understand what's happening because again, it's, it's really showing us how you're going to operate this business and we want that performance to to succeed.

Okay, got it. And is that it for the buyer side then?

Yep. Yeah, that's, that's, I would say, the biggest 3 key things that we will look for in a buyer.

Okay. And then on the seller side, this is interesting. So you're going to analyze the book of business and I assume you will— you guys lend both for asset purchases and stock purchases?

Yeah, so we will do either. It's, it's really up to you. We always say talk to an accountant and an attorney on how you want that to look. You know, obviously there's a, probably a little bit more risk on a stock purchase because you're buying the whole company liabilities could kind of fall through with that, but could be tax purpose reasons on why either party wants to do a stock purchase, but we can, we can do either or it's, it's really yours and the seller's preference.

Okay, great. So then for the company, you know, the selling company, what are you looking at there?

Yeah, so the biggest thing on the seller's company is going to be cash flow trends of the business and the relationship to door count. Again, we underwrite to a debt service coverage ratio. Even though you are essentially just buying the management contracts of a property management company, we still have to have financials to analyze the business. We still want to make sure that revenue is not going down. We want to understand the door count. Is it high or low concentration per owner? You know, buying a business that's got, let's just say, 100 doors and 50 of those doors are owned by one individual, that's also going to be a red flag to us. Yeah, we'll look at it as that individual goes away, you've lost 50% of your revenue. So want to look at trends of door count. The margins, the revenue of the cash flow of that, of that business. Have they lost a ton of employees? That's, that's also a red flag. What's the reason? You know, does the culture fit with your existing business and this business? What is your, what's your overall business plan? Are you going to merge everything, employees and staffing? So want to just kind of make sure that on both sides, buyers and seller side, it makes sense for the buyer.

Yeah, that client concentration risk is a big one. And that's, I mean, you're honestly, you're doing your buyers a favor by looking carefully at these items because I think a lot of buyers don't put enough weight on some of these concerns that you've raised. So it's good to have, you know, if a bank is having concerns about a loan, that's usually something you should look into rather than just be mad at the bank. Yeah, it's been my experience. Because they've done a lot of these loans and they'd rather make money on you. But if they're worried about losing their money on your deal, then you should probably look at that.

So, yeah. And I would agree that we, yeah, we want to be a partner, not, you know, if it doesn't make sense, we're going to kind of be the first ones to let you know, you know, we can't get comfortable with this purchase price or there's some negative trends, some red flags in this business. It can't support it. And we will explain why, but we want you to succeed and come back in 2 years to acquire another business, not fail as soon as you get into it. So lots of questions and, and we want to understand you as a buyer. How does, how is this going to look for you?

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Yeah. So in regards to term, for a business acquisition and property management, it is a 10-year loan term. So there's no commercial real estate that you're buying. It's just the straight book of business. And that 10 years is fully amortized. So there are no balloon payments and there are no prepayment penalties tied to that. So, you know, you have the flexibility to expand it over 10 years, but in your head you're saying, I'm really gonna pay this off in 3 or 5 years. That's great. You have the capability to do that. You're also looking at, if you've got an existing property management company and you're buying a second, third, or fourth, you could qualify for 100% financing to where you don't have to put cash down. You know, of course it's always great to put a little bit of cash down, but not required in that instance.

Yeah. So let me highlight that because this, this blows me away every time I hear it. I don't know if people were like, you know, stuck at a red light and looked at their phone, they may have missed this. So if you already own a management company and you're buying another one, potentially you could get it up to 100% financed.

Yes.

That's amazing.

All of the closing costs, attached, 100% of the acquisition and any working capital that you maybe want built in just for like a 30-day transition period. Yeah, all financed over that 10-year period.

So cool. And this, this really opens up a lot of opportunities for buyers because historically we've really had to rely on seller financing for almost all of these deals, if we're being honest. And I've seen a lot of them come through with the M&A report I had questions in that survey about how it was financed. I didn't address that in the first release of the M&A report, but we're going to be diving much more deeply into that into a future update. And the ability to have another option besides seller financing really opens up more doors because number one, you're not relying on the seller to finance the deal, which they like to use as a lever to pull against the purchase price and other things. It's like, well, if you want me to carry the note, That's more risk. So the price needs to be higher. You can just take that completely off the table and separate your financing costs from the deal cost or the deal terms. The other thing is I think it can make your purchase offer much more attractive to a potential seller and say, listen, I'm going to be cash at closing. You don't need to carry a note or anything like that. So, you know, this is, and this is why, like, I'm careful about bringing like quote vendors onto my show because No one wants to just listen to vendors pitch all day long. But the reason I wanted to talk to you, Jordan, is because I think this is just a genuine value add for our industry. And there's just, there just hasn't been options like this in the past. And so I, I get excited about it because we've done two acquisitions in the past and, and we did have to do one of them. We had to do a seller note and it's uncomfortable to have this ongoing payments and like, I don't know, it just adds another layer of complexity. So.

Yeah, I mean, and like you said, it gives you as a buyer and even a seller options. They can do 100% financing. You know, whenever seller notes are involved, sellers seem to think it can maybe still somewhat be their business and maybe just really want to cut ties with that individual and say, yeah, exactly, I don't really need you involved or I don't need to pay you or talk to you. This is my business, 100% financing. See you later. Yeah. But then you do have the flexibility of maybe seller wants to hold a 20% seller note and the bank will finance the remaining 80%. So, you know, you can really make that look however you and the seller want, as long as cash flow will allow, because, you know, typically seller notes are gonna be 3 or 5-year loan terms, maybe even 2. So you wanna make sure again, that even if there's a seller note involved, Can the business support it? Does it make sense from a risk perspective? And if not, we will kind of walk you through what that needs to look like to get the bank comfortable moving forward.

Got it. And what is, how is the interest rate set for these types of loans?

Yeah, so interest rates on the SBA loans are all going to be based off a prime rate, prime plus a spread. So prime today is around 7.5%. So, you know, you could probably see an interest rate anywhere between, let's just say median range, 9.25% to 9.75%, which is typically a variable rate, but it's really gonna be dependent on the loan size, the quality of the deal that you're looking to acquire, and then personal experience and personal background. So it's a little bit based off of risk because it's an unsecured business loan.

Oh, it's unsecured. I mean, can you explain what that means? Unsecured?

Yeah. So I say unsecured, meaning that we will take like a first UCC filing against the business assets that you're looking to acquire. But if you do not have properties or you do not have to have collateral to put up against the loan to qualify for an SBA loan. So if you, let's just say you have no equity in your home, you don't have any cash to put down, you qualify for 100% financing because it's an expansion loan for you. You're essentially getting an unsecured business loan. We don't have to take a lien on your property. Now, Caveat to that, and for SBA and probably the biggest downfall, and to be just kind of transparent, is if you do have equity in, in a home, primary residence or a rental property of 25% or more, we do have to take a junior lien position per the SBA on that property. We're not jumping in front of a first, we're not jumping in front of your primary lender. It's really just dependent on is there equity in, in that property, but if you don't have a home or there is no equity, there's no liens that have to be taken. You can essentially qualify for an unsecured business loan, essentially.

Okay. So the lesson I'm taking away from this is do a cash-out refinance before I approach Live Oak for a, for a loan to buy a business. So there's less than 25% equity left.

I'm going to say no comment there.

Yeah. What about like, would you take a position against my existing business?

We, it kind of depends on if we're leveraging that entity for cash flow.

Okay. Like, so meaning does the acquisition sort of cash flow on its own, almost like as if you were buying a rental property versus, hey, we're not so sure about this bolt-on acquisition. We need to lean into the cash flow from your existing business to support it.

Yep. And if we do end up taking a UCC, which is just really a commercial code filing, it's— we would take a junior lien. We would never jump in front of a first or a second on your existing business entity. It's really, you know, we have to be in a first on the assets that you're looking to acquire.

Yeah.

And then we may take just a best UCC filing on other entities that are supporting the business loan.

Okay. Now, if you've been around kind of small business Twitter, small business podcast world, you've heard about PG, personal guarantee, that often goes along with SBA loans. Can you explain what that means in this context?

Yeah. So if the SBA loan product does require a personal guarantor and we at Live Oak do always require a personal guarantor, even if it's a conventional type structure, And the requirement for SBA loans are if you own the business 20% or more of the operating company that you're acquiring post-closing, you are required to personally guarantee that loan. So you've got your operating company as a borrower, and then you as an individual are going to be a personal guarantor on the loan as well.

Got it. And so that's a serious thing. I don't want to— I don't want to, you know, skip over that on behalf of my audience. There's, there's, you know, everything in life is trade-offs, right? So the trade-off for getting a really sweet loan and having been able to acquire a business in this case and not use seller financing is you're going to deal with the big boys over at the SBA and they're going to require, hey, you're going to personally guarantee this loan. And from what I understand, they're pretty serious about that. And there's been stories of, you know, they're going to go after your home, they're going to go after whatever in order to recoup those funds. So you should really think carefully, and I'm sure you would encourage the same. Think carefully before you sign on these type of loans. Make sure you're very, very comfortable with the business that you're acquiring.

Yeah. And again, I mean, that's— these are the questions you want to ask your lender on the front end. What does this look like? What are the implications? Because you— again, these are just options for you as a buyer, and you have to look at the pros and the cons. Pros are you are going to get a longer loan term. You can qualify for 100% financing and cut the seller out of the project altogether. The, I guess, potential cons in this type of scenario is you will have to be a personal guarantor on the loan. But if the business can cash flow and you are already a successful property management in the space, understand what you're doing, you know, that should hopefully not be as big of a factor or fear for you. And we want to make sure that you understand that on the front end because unfortunately a personal guarantor is a requirement on these type of loans.

Yeah. And where you see those, where you see these go bad for people is not existing business doing a little bolt-on acquisition. It's W-2 sales guy decides he's going to buy a plumbing company for the first time ever, has never worked at a plumbing company, has no experience owning or running a business, gets this huge SBA loan to acquire some local plumbing company, and then 90 days later He's bankrupt. SBA's knocking on the door. It's a big mess. Like you can see a lot of those stories, but it just, like you said, I mean, if you're an existing property management operator, you've been in business for years, you know, you know of a local company that you can acquire. I think that's unlikely to present an issue for you, but you should really model it out yourself and look at, okay, well, this is what my, you know, debt payment is going to be on the loan and here's the cash flow I expect from the acquisition. The thing I'll say in my experience from acquiring these books of business is that you will churn out a lot of the owners, way more than you expect through those first 30, 60, 90 days of acquiring the books of business from the other property management company. The owners who are getting, you know, sort of acquired, they don't always like that and they'll take the opportunity to shop around or sell their, sell their property or whatever. So just make sure that you're either your contract clause has a really great clawback protecting you, or you've kind of underwritten 25% churn after close just to make sure that, you know, it still would cash flow for you after that.

Yeah. And you make up a really great point and want to take just a couple of minutes to kind of talk about that callback clause and what, you know, we always advocate for some type of callback in a purchase agreement. And that can look a couple of different ways. You know, one, we can still provide you 100% financing, and you put, you know, let's say 10 or 15% of that in an escrow account for 12 months, 6 or 12 months, really don't want to go over 12 months. After 12, it really should, you know, things should really be flowing the way it needs to flow. But if, you know, the metric of if you lose X amount of doors or X amount of revenue or NOI in the 6 or 12-month period, that those funds that are sitting in escrow pay down that loan and we can reamortize it. And now your monthly payment is going to be based off of 85% of what you bought versus—

Oh, that's cool.

100%. Yeah. Or—

Yeah.

Sellers could hold that on a seller note and if it doesn't get— those metrics don't get met in 6 or 12 months, the seller note gets forgiven and you don't ever pay on that seller note.

Yeah.

So I think it's very a risk advocate for buyers to have some type of callback and understanding what you want that to look like for you, for the first smooth transition in case you do lose owners because of the transition.

Absolutely. And you will, you're going to lose a few just no matter what you do in my experience. And in talking with other folks who have done a lot of these, it's interesting to hear you advocate for the clawback because I'm thinking back to my days 6 or 8 years ago when we were talking to an SBA, not an SBA lender, but a bank who was doing an SBA loan for us. And they said, oh, SBA doesn't allow clawbacks at all., and that was kind of a deal breaker for us 'cause we really needed to have that in place.

Yeah. So we, we will advocate for a callback. We cannot do the opposite, which is an earnout, which is gonna benefit a seller, meaning that the seller cannot increase purchase price post-closing. You're buying the business today. And so that's what you're basing your valuation, you're basing your purchase price off of. They're out of the picture. So just because you as this new buyer have grown the business from 100 doors to 130 doors in the first year, sellers should not be able to benefit from that. You're the one putting in that effort. So we like the purchase price to be decreased if it makes sense, but we cannot go and increase after you close the loan.

That just shows you how uneducated this other bank we were working with was that they didn't even understand the difference between an earnout and a clawback. And they were trying to tell us that the SBA didn't allow clawbacks and That was obviously not true. So today's episode is brought to you by AppFolio. Hey everyone, we all know that the real estate industry is facing a tough market right now. Record high costs, rising vacancies, increasing application fraud, not to mention the fragmented technology solutions that just can't keep pace. We've been told that fine-tuning processes in the name of operational efficiency is the answer, but that narrow focus can be a trap and your current property management software is keeping you there. The only way to cross that gap between simply managing tasks and creating real value for your stakeholders is with a performance platform like Appfolio, our sponsor for today's episode. I got to see Appfolio Performance Platform firsthand at Future, Appfolio's annual industry conference, and let me tell you, it's a whole new era in real estate. Designed with native AI as a core building block, a performance Plan requires a system of record that captures and stores your data, an AI-powered system of action that acts on that data to complete work for your teams, and a system of growth that capitalizes on critical moments in the customer journey to unlock benefits for everyone. Deeper human connection, more community impact, bigger business outcomes— that's what you get when your business is really performing. It's time to recast the role of property manager from taskmaster to value driver and create more winning outcomes for everyone. Head to appfolio.com to learn more. And next week, don't miss my interview with their Chief Marketing Officer, Lisa Horner, where we'll discuss what's actually working in property management marketing today. Thanks again to AppFolio for sponsoring this week's episode. You know, the— you mentioned how these are kind of like unsecured business loans because we're not buying a piece of real property or a big, you know, piece of industrial equipment. That you can collateralize. And I think what you— the, the, the reason we haven't seen other banks step in and offer loans for our industry like the way Live Oak is right now is for that reason, because they're unsecured. Is that the case? Is that why it's sort of been just until 2 years ago we had very limited options?

Yeah, I just don't think that other banks understand the industry. I mean, it's, it is risky because again, it's, you're potentially just taking a UCC filing and some banks don't want to take that risk and they're heavily geared towards, we want to have tangible real estate collateral to where we've got the industry expertise, but we've got the expertise in SBA financing. And so we can get comfortable, but again, we're looking at all these different metrics of Who's the buyer and what does the seller's cash flow look like?

Okay. So I was curious for folks who may be shopping around to different SBA lenders and looking at things, what are some of the things that we should be looking out for or asking about during the process of getting approved for, or investigating, you know, our options for a loan, a business loan like this? Yeah.

So like investigating Towards your bank or investigating towards the seller?

Towards the bank.

The bank. Towards the bank. So, you know, one thing to ask for and understand is, do they understand SBA? Are they a preferred lender? If not, ask questions of, well, how many SBA loans have you done? Have you done business loans before? And ask, you know, do a little bit of homework before you go to the bank. You know, ask questions that you kind of have the answers for. Well, what's the equity injection requirement? What's the collateral requirement? And kind of see what their responses are, because that's going to give you an indication of do they really know what they're talking about? And then ask them, you know, do they understand your industry? Do they know anything about property management? Or again, are they giving personal loans and car loans? Do they really understand what they're talking about when it comes to a true property management business loan, and then ask how they service their loan. You know, what are, what's going to happen after your loan closes? Is it you've got this 1-800 number when you've got questions or want to do a loan modification and you can't find anyone that you want to talk to and your lender has changed 25 different times from the start to finish. So understand what, what does the process look like? What does the timing look like? And are, are they qualified as a lender to give you an SBA business loan for property management.

Got it. Something I hear thrown around and you see it sometimes on business listings is SBA pre-approved or SBA-approved businesses. That's like totally fake, right? Is this like not a thing?

So I will— I guess I will— what we would call pre-qualified buyers, you know, where again, what that does is we're really looking at their existing business. They're pulling the credit, understanding their backgrounds, and hey, we really like you as an individual. We will lend to you all day long. But the other caveat to that is you have to find a business that makes sense. It's in your market, it's cash flowing. So again, two completely different parts of what are we comfortable with. And we've looked kind of on the opposite side of, we've looked at seller businesses and said, okay, we can get comfortable based off of your cash flow kind of around this purchase price or this loan amount. But that is all dependent on the buyer. Yeah. What does the buyer profile look like? So to me, it's really hard to just say, hey, you know, seller, you're, you're prequalified for this amount. Well, you may have a buyer that doesn't have cash or that can't support this amount of debt or has no experience or whatever. Yeah. And so that's going to change, you know, everything based off of each separate individual's buyers and sellers.

Yeah. I mean, nevertheless, does it make sense for somebody who's thinking about selling their PM business to talk with you about— to talk with you early in the process so that you could be introduced to a potential buyer to, to like add options for them? Is that something that you guys do?

Yeah, absolutely. I mean, I, to me, I personally like to have relationships with sellers because it, one, it helps them understand the process. It helps them understand how we analyze and look at a cash flow business. And then it helps them kind of gear up. Maybe they're not ready to sell now, but in 24 months they are. Well, let's walk through cash flow and explain that. And then, you know, maybe get some type of consultant to get your numbers where you want it to be, get your margins where they need to be. So when you're ready to sell in 2 years, you are maximizing all of your profitability for you as a seller for that exit strategy. Or maybe it's, I want to sell in 12 months to my key employee. How can I set them up for success for a loan? And we kind of just walk through and help you understand what this can look like for you from a loan perspective.

Got it. Okay. Yeah, I didn't know that. So that's good to know. So if you're thinking about selling, you might as well talk with these guys. And then if you've got buyers who come around but they're having trouble reaching your price or you're not comfortable with the seller note, you can make that introduction, say, hey, you talk to these guys, they know my business, they like the business, and they're probably willing to work with you given some basic, you know, checks.

Yeah. Yep. And that's— I mean, again, we prequalify buyers a lot where we say, you know, again, like everything you've got going for you, background, existing business-wise, you've got cash to put in if you need to put cash in. So we're comfortable with you, but again, go find that right business that makes sense for you to buy.

Yeah. Now, if, if I do a loan with you guys, do you, do you require me to open like a checking account or move my trust accounts over to you? Like, is that required or anything?

No. So we do have a deposit account here, just your typical kind of checking savings, which we do have great rates on the savings side of things in checking accounts. But we are not, it's not a requirement. So, okay. You know, the trust accounting side of things is very, very complex. There's a lot of rules, there's a lot of regulations. Um, so that is not a, a hard requirement for us to get a business loan.

Okay. Got it. That's good to know. Like in Ohio, they've got a rule that you can't bank with a bank unless they have a physical presence in the state.

Yeah. Yeah, yeah, yeah. There are some states where you have to have a brick and mortar and, you know, we're a branchless bank. We're headquartered in Wilmington, so that limits us. But that's also at this point in time, not our expertise on the trust accounting side. We really kind of want to focus on— we're really good at the acquisition financing. You know, of course, if you want to have an operating and just a true operating checking account, ACH stuff, would love for you to do that, but not a hard requirement just based off of the trust accounting and the requirements and regulations there.

I always like when, when a business is willing to say, no, we don't, we don't do that, because that to me shows that you're focused, you're clear on what your value is and what your skill set is, and you're not just trying to be everything to everyone. That was a problem I ran into with that other bank is like, yeah, we'll do an SBA loan, right? You know, they didn't know. So it's awesome to have that clarity like, hey, yeah, we're not— we don't really, you know, we're not necessarily going after your trust account business. We're looking at— we're narrowly focused on this one specific thing. If I wanted to go and get like just a working capital line of credit for my property management company, which I like to have these around. Yeah. Is that something you guys do as well? And what does that process look like?

Yeah. So we can provide lines of credit. You know, the amount is really going to be dependent on what, what your business's operating cash looks like and what the true need is. You know, if, if you don't need a $500,000 line of credit, we're probably not gonna give you a $500,000 line of credit. But really what that looks like is we're making sure, again, existing business can cover the debt. If we looked at the balance is fully drawn on, understand what do you really need the line of credit for? It's always good to kind of have that cushion, like you're saying, just to kind of have, but maybe it's not necessarily needed at this time. Time. So really just want to have a good understanding of why do you need the line of credit? How much are you kind of thinking? And what does that look like based off of historical operations?

You know, the old saying, the best time to get a line of credit is when you don't need it. So, like, I like in, in sort of good times, so to speak, I like to talk to my bankers, talk to my, you know, different options and make available both personally and in my business, credit. Like we went out and got a line of credit available for our business years and years and years ago. We've only ever used it once for just like really short time, but I went and got it when I didn't need it because for whatever reason, that's how banks work. Like, you know, it's easier to get something when you don't need it. When you truly need it, you're like, you know, life and death, they're not going to give it to you. So don't go to them then. Wait till a good time and make up some reason. Yeah, we need this line of credit for like potential expansion or whatever. This is my words, not yours. And then, then you get it when you don't really need it, and then you have it for if you do need it. And same thing in my personal. I'm always looking to expand my access to credit, whether it's home equity line of credit, credit card limits, and other things. Not because I'm using them or maxing them out, far from it. But if an opportunity comes around to buy an investment property, to buy another management company or whatever, I want to be able to move quickly and then I can refinance or recapitalize that, you know, temporary line of credit with a more traditional type of a loan product.

Yeah, absolutely. And I would just chime in and say, you know, if you are looking to do a line of credit, don't have maxed out credit cards and then come for a line of credit because the question will be, huh, you don't have any more credit available. Why are you needing it?

I told you guys, look, she's already telling you, don't wait till you need it.

Yeah, so good points.

The other thing you mentioned a while ago when we jumped on a call, which I thought was really interesting, is you could— you guys, if I remember right, have a product that will help refinance like a seller note. So if you are already entangled with the seller and a seller note and you want to, you want to separate that, you can talk with these, these guys about, hey, refinance me out of my seller note.

Yeah. Yep. Absolutely. The only thing about a seller note is you do have to have it in good standing and make payments for at least 24 months to qualify for it to be refinanced. But maybe there's a balloon payment coming up and you don't want to have to put $500,000 lump sum down at the end of year 3. Well, you know, pay on that note for 2 years, or maybe that time is ready and you've got a balloon coming up. Absolutely. We can refinance that. And that debt that we're refinancing is going to now go over 10 years, 10-year loan term and no prepayment penalties. So it's gonna give you a little bit relaxation in cash flow because you're now able to kind of expand that debt and you're not having to pull everything from your balance sheet and put that into paying off the seller. Or maybe you've got an 8-year seller note, but you don't like the seller and you really just want them to get out of the picture. I mean, yes, that's also something, as long as it's been paid on for 2 years and it's got unfavorable loan terms for you as a property management owner, we can most certainly refinance seller note debt. And we like to refinance seller note debt because you've got a, you've already got a track record of paying it for 24 months and you've proven you can do that. Your business is obviously paying for it, so it's cash flowing great. So it's a very low risk type transaction and you're getting the seller out of the picture and freeing up cash flow.

Oh yeah, super cool. Really cool stuff. And by the way, if you're hearing any of this and you're like, okay, I want to get in on this, I want to get a line of credit, we got an acquisition, I want to refinance a seller note, there's a link in the show notes that goes to a landing page. Enterprise or Live Oak has a special landing page that I set up for listeners of the podcast and readers of the newsletter. If you go through there, they're going to know you heard about it through me and take great care of you. So we'll make sure we have that link in all the show notes for all the platforms. I wanted to see if you have any horror stories. I think it's fun to hear about when things go bad from time to time. Maybe we can take a lesson or two away from that. But what have you seen where a loan just didn't go through because you uncovered fraud? Or, you know, just any kind of a things going horribly wrong and sideways. Unfortunately, as humans, we all like to hear about other people's, uh, missteps and misfortunes and maybe learn a lesson or two. So I'd love to hear anything on that front?

Yeah, so I would say for this, this industry, the biggest thing that I can say is time kills deals. And what I mean by that is we've had, you know, a deal in our closing pipeline. So it's, you know, underwriting has been done. They're ready to go. They're just getting the documents together and buyers and sellers, you know, go out of town and their attorney's gone. And so now we have drug out from a what should be a 30, 45-day closing. We're now 6 months in. Seller's already checked out and said, not, you know, I'm selling this business, gonna be, don't really care what happens to it. Well, at some point you're gonna need to get updated financials and reapproval, and it, it has just gone terribly wrong because they've lost customers, they've lost doors, they don't care, they're not paying stuff. And to us, we could not get comfortable and neither did the buyer. The buyer said, I don't wanna buy this anymore. It's not worth what it was when we started this because of the time. So that would, you know, especially for this industry, would be maybe the biggest, I guess, horror story in the past 24 months since we've been doing this, that the longer that you kind of wait and try to get to that closing table, the more issues are going to come up and, and arise.

Yeah, time kills deals. Yes. I'm curious how closely you all look at the trust accounting details on the seller's business, because in my experience of buying books of business, even though we're buying the book of business and not the shares in the corporation, so like theoretically the trust accounting details don't really matter that much, it has come back to bite us because, for example, in one of the deals we did, we closed, we were like ready to close and we said, okay, you know, just give us a check for the security deposits. And the seller was like, oh, we don't hold the security deposits. We were like, what do you mean you don't have the security deposit in your trust account? They're like, no, we distribute those right to the owner as soon as they come in. And we're like, oh, okay. And we just kind of like, we just proceeded and closed. Well, that was true. They did distribute the security deposits to the owners. The problem is the owners didn't really understand that accounting. Yeah, because they just credit it to their owner account. And so what happened every single time we had a move out from those accounts that we purchased, the owner said, well, why is it this expensive? Didn't you take the security deposit to pay for some of these damages? And we said, well, actually, you got the security deposit 3 years ago when the tenant moved in. And the, the owner said, no, we didn't. And we said, yeah, we did. And luckily we were able to get access to their old Appfolio account. Dig up, show them the statement showing that they actually did get it. But of course they didn't believe it and it was all this, you know, arguing about it. So I, you know, just whether you guys look into it or not, my advice to the audience is really take a close look at the trust account and have the security deposits and the reserves been properly accounted for and what is the owner's understanding of how that was done, just so you don't run into any surprises.

Yeah, I mean, I think is, you know, as you're what I had mentioned, kind of interviewing a bank on what this looks like. You've got to understand what you're buying. Yep. Ask questions, understand what you're buying, and that is going to include the ebbs and flows, the deposits, the security side, the staffing, you know, understand what you're buying and make sure that you fully understand how their operations work. How are their management agreements laid out? Does that kind of fit your current culture and the way that currently running your business? Is this a complete 180? And, you know, businesses don't really merge, so you have to do your own due diligence as a buyer to kind of make sure this makes sense. It fits kind of my portfolio, my culture of my existing business, and I'm kind of ready to proceed.

Love it. Jordan, are you or anyone from your team going to be at any conferences coming up in our industry?

Yes. So Live Oak will be at the NARPM event The nationals, I think that's in October. Mm-hmm. So we will be there. And so super excited. We'll be at the, there's a, an event, the PMI event in September that we'll be at. I think they're in Florida, both of them. The national's also in Florida, isn't it this year? Yes. Yes. Yep. So we'll be, Live Oak will be at both of those. And then we've got a whole year of 2026 of different events that we're kind of planning out to, to be at kind of scattered throughout the year. Okay, great.

Yeah, that's awesome. And I think, you know, sort of what I was saying before, the best time to get to know a banker is when you don't need something from them. So I would encourage everyone who's listening to this, whether you're ready to sell, ready to buy, or not, reach out, fill out the form, connect with Jordan and her team over at Live Oak, so that when you do go to get a loan, oh yeah, I remember that guy. Oh yeah, we had this great conversation, right? That just I'm just telling you my advice, one operator to another. You want to have those relationships in place prior to, like, the way you don't want to start the relationship with Jordan is, hey, we're supposed to close in 30 days, but the seller doesn't want to finance it. Like, I really need to get on the phone with you. Like, that is not going to give her the warm fuzzies. Now, she'll probably still help you out because she's great. But just my advice to you is set up these relationships before you need them. That's my thought.

Yeah. I mean, Exactly. Even if you're, if it's, if you don't have anything in mind today, it's in 6 or 12 months, let's have a conversation, get you prepped and ready.

Yeah.

You know what to ask for from the seller, you know what we need from you, and it makes it just that much smoother and it makes it that much quicker when we get there.

Awesome. Well, we'll drop a link to that landing page as well as your LinkedIn where folks can connect with you directly. And it was great having you on the show today, Jordan.

Thank you. Yeah, absolutely. Thanks so much.

If you like the show and want to get connected to the community, you can follow me on Twitter @PSLohmann and subscribe to my email newsletter on my website, peterlohmann.com. I try to share as much valuable property management content as I can on a regular basis. Thanks again for listening and have a great week.