06/10/2009
Stop Dialing for Dollars and Make Every Call Count!
Are you new to commercial? Have you received a commercial loan request and quickly found yourself “dialing for dollars,” calling every lender under the sun to place your loan? Are you craving a more efficient approach, and the tools you need to quickly locate a lender? You are not alone!
When residential mortgage brokers look to provide a solution for their commercial clients, they aren’t always prepared with the critical information needed to quickly and effectively obtain a quote. Conversations between commercial lenders and less experienced brokers often follow a pattern like this:
Broker:
“I’m looking to place a commercial loan”
Lender:
“Great. Where is the property located?”
Broker:
“California.”
Lender:
“Where in California?”
Broker:
“My client didn’t give me an exact address, but I can get that.”
Lender
“Ok. What type of property are we talking about?”
Broker:
“It’s a commercial property.”
Lender:
“What specifically is it? What kind of business exists in the property?”
Broker:
“I believe it’s a grocery store, but I’m really just calling for rates and terms to see what you can do.”
Lender:
“I’m going to need some more specific information before I can help you.”
If you are new to commercial lending, and value your time and income stream, here’s a simple guide to better prepare you for each and every lender call. With this information at the ready, you will dramatically reduce your time and effort in finding a lender, and increase the probability of quickly closing your loan and collecting a large commission!
Learn the basic information
It is critical to have the basic information at the ready for every lender you contact. Here’s what you need to know before placing your call:
- Property type
- Be specific. Is it mixed use, retail, church, drive thru restaurant, etc?
- Property location
- Provide a complete address for all properties involved in the transaction.
- Owner/user or investment property
- Lenders must know if a property is owner user or investor. Some lenders only work with one type or the other.
- Estimated property value
For a refinance, determining the value of the property is often tricky. Obtain the tax-assessed value, borrower’s perceived value, purchase price, year of purchase and the square footage of the lot and building(s). Do not order an appraisal before contacting a lender. Many lenders work with a select list of appraisers, while other lenders may not need an appraisal at all, based on the strength of the deal. - Loan amount desired
Determine all the needs of your client before arriving at this number. Debt consolidation, cash out for repairs, operating capital, equipment purchase and countless other factors may add to the total. Don’t forget to include loan costs, as these are often overlooked by less experienced brokers.
Time frame to closing
It is critical to determine your client’s time frame for closing the loan. Some lenders can close in as little as a few days, if necessary. Others take 60 days or more.
- Credit scores
- Pull a credit report before placing your calls to lenders. This will help the lenders identify pricing options.
- Business/ property income & profitability
- The financial strength of a property and/or business assists the lender in determining pricing options.
Do your homework on the lender
There are many sources for learning more about lenders before placing a call. Study their matrix, visit their website, and look for their advertisements, until you feel they are a solid prospect to assist with your loan.
You don’t need to spend lots of time in this stage, but just enough to determine if a phone call is worth your time. In my experience, the most successful brokers spend a few minutes per lender on background research before placing a call. Your time is too valuable to waste placing10, 20 or more calls to every lender in the book. Do your homework first!
Educate yourself about commercial lending
If you’re just getting your feet wet with commercial lending, there are many paths to obtaining a greater understanding of the commercial side of the business. Several trade publications, such as this one, will familiarize you with the terms, scenarios, regulations, and industry news of commercial lending. There are lending books, dictionaries, and seminars that will help as well. (A good source is the Mortgage Bankers Association website and bookstore).
Perhaps the best way to learn the commercial side of the business is through a mentor who has considerable expertise in this niche, and the willingness to share that knowledge. The most likely source of this expertise is often a commercial broker in your office who can consistently share their knowledge over time, and as commercial loan opportunities arise.
Understanding the basics of commercial lending will put you ahead of 90% of residential brokers who happen to have a commercial deal fall in their lap. Every call you make will be far less time consuming, less painful, and more productive, when you have the knowledge of an experienced commercial broker on your side!
Put these tips to the test!
It’s always a temptation to immediately start “dialing for dollars” when a client comes to you for a commercial loan. Resist that reflex, and you put yourself ahead of 90% of the brokers in the business by fully preparing for every lender call you make. Before long, you may find commercial loans to be a huge component of a successful and highly lucrative mortgage career!
05/26/2009
Hard Money Commercial Investment Loans-Significant Equity is the Key to Success!
Every day, more residential mortgage brokers are dipping their toes in the waters of commercial lending. Small commercial investment loans are one of the more common types of these loans for brokers to handle. In most cases, placing commercial investment loans is not too difficult. But how does a broker successfully place these loans if traditional lending options are not available?
There are a wide variety of lenders to choose from that will work with brokers on conforming deals. Many lenders make processing similar to that of a residential loan, providing a smooth experience for the residential-oriented broker. However, there are some common challenges you may face when facilitating these small commercial transactions. Some of these challenges include the following:
- Loan amounts are too small for the banks
- Income and expenses from the property are not well documented by the seller or borrower
- Borrower has insufficient credit to qualify for conventional rates
- The property itself needs repairs
If these or other challenges keep you from placing commercial investment loans with traditional lenders, where do you turn to get the job done? Often times, a hard money lender is your only option.
Succeeding with Hard Money
The single most important factor in the success of a hard money commercial investment loan is the amount of equity the borrower has to offer in the transaction. Most hard money commercial lenders will only lend up to 65-70% of the property value. Keep in mind that this LTV will include points and closing costs as well, which could bring the actual loan amount to somewhere in the 60-65% range of the property value.
In the case of a hard money borrower looking to get into a property with “as little down as possible,” you can get around the relatively low LTV requirements of hard money lenders. This usually comes in the form of a seller carry-back where the seller lends the difference between the property value, the amount the lender will provide, and the amount the borrower can contribute.
Although this high-leverage strategy can work in certain situations, these transactions have little probability of closing. The reason is that, though the borrower may be able to obtain the property with a hard money lender and a seller carry, the combined monthly payments generated by these loans creates a situation where net cash flow from the property becomes slim or even negative. The effect of the high leverage and significant interest rates and fees may be too expensive for the income from the property to sustain the payments. With favorable interest rates and fees, or significant equity, or both, these loans are much more likely to close and become profitable for borrowers and an income source for brokers.
The key to a successful investment transaction in the hard money arena is significant equity, either because the lender’s requirements dictate that, or the monthly payments of a hard money loan or combination of a hard money loan plus another solution will render the investment not profitable.
Beware of the “Steal of the Century”
One scenario that regularly presents itself is a borrower who claims to have gotten the “steal of the century” by obtaining a property for half of what it’s worth. Borrowers often use this line to avoid putting cash or equity into their purchase or refinance, claiming that their loan amount and purchase price is somewhere around half the value. Be very skeptical of these transactions, especially if the borrower only qualifies for hard money.
In my experience, in nine out of ten of these instances, the purchase price of the property approximates the true value. In the majority of instances where this is the case, if the borrower has little or no money to inject in to the deal, they will find themselves in the position described above, with loan payments and expenses exceeding the income from the property. Therefore, a good rule is to use the purchase price in LTV calculations instead of the borrower’s claim of what the property is worth. This simple step will save you time, effort, and significant heartburn in the long run.
Make Money on Commercial Investment Loans!
When it comes to commercial hard money investment loans, remember that your chances of closing the deal are increased dramatically when the borrower has significant equity into the transaction. With this information in hand, you have one more important piece of information to make commercial lending a wildly successful segment of your business!
12/29/2008
Commercial Lending Industry Asking for Federal Relief
Troubled commercial lenders and developers are requesting money from the US Treasury, in an effort to prevent the same lending meltdown that occurred in the residential sector from happening to the commercial real estate industry. In a recent letter, 12 commercial real estate industry associates have requested an “extension of the Term Asset-backed Securities Loan Facility (TALF) to guarantee, finance, or purchase highly rated, asset-backed securities collateralized by newly or recently originated commercial real estate mortgages.”
It is estimated that in 2009, $400 billion in commercial real estate mortgages will come due, requiring refinancing. The problem is that the high demand, combined with frozen credit markets will strain the supply of funds, forcing many property owners that hold good, cash-flowing property into default.
The government did mention that TALF–who provides a lending capacity of $180 billion to secure lending backed by credit card debt, auto loans, etc.–could be extended to commercial real estate mortgages. Many fear, however, that a bailout will not have a significant effect, or that it is even possible to provide enough liquidity to commercial lenders to make a real difference. TARP (Troubled Asset Relief Program) money is already spoken for by banks to write down credit card debt, auto loans, residential mortgages, and other consumer debt. It is questionable whether there is any money available to extend to the commercial real estate sector.
Those who particularly favor a rescue package are primarily the retail and hospitality sectors. Retailers are facing upcoming balloon payments, and the inability to refinance prior to that due date would force them to default, further affecting consumerism and the economy as a whole. The hospitality industry is slightly less shaky, due to more correctly underwritten loans at origination. However, these loans will still require refinancing, and the question remains: are they good enough to refinance?
Various entities within the commercial lending and real estate industry are still brainstorming ideas to sustain it, and the Commercial Mortgage Securities Association has met twice with the Treasury Department to discuss options. A third meeting is scheduled after the New Year to further explore possibilities to prevent a downfall in the commercial real estate sector.
We at Fairway believe that the commercial real estate sector will certainly get hit to some degree, with some property types and geographic regions getting hit worse than others. This is why we have taken a conservative approach to our property valuations as well as the percentage we lend against that valuation. We believe also that this market environment will present many unique opportunities for people who have capital to lend and to invest in property that may very well be temporarily undervalued. While things are still very much up in the air as to the total impact of this market meltdown, we look forward to seeing what 2009 will bring.