Commercial real estate loans are becoming more commonly used by real estate investors and wealthy property buyers. With conventional lending still trying to catch up, more and more individuals are using various forms of commercial financing. Having said that, what do borrowers need to know about commercial loans? Perhaps even more importantly, how can they prepare to secure the best loans when the situation presents itself?
Commercial Mortgage Lending on the Rise
The last couple of years have seen a number of new commercial mortgage lenders stepping into the market to provide a variety of financing options to fill the void left by banks. They are in a position to deliver liquidity to meet new needs in a new landscape.
Tough regulations have made it scary for lenders to work in the residential space, yet those with capital are eager to put it to work and fund good deals. Beyond traditional commercial lending, real estate investors and wealthy buyers are using these lenders for ‘business’ funds to acquire luxury homes, land, and portfolios of single-family rental homes, as well as for wholesaling houses and fixing and flipping.
Choosing the Right Lender
The first step in securing a great property loan is choosing the right mortgage lender. If your loan isn’t a good fit for the lender, they will find plenty of reasons to turn it down. At best, they might make it so expensive that it barely makes sense for your to take. Therefore, before choosing a lender to apply to, make sure they are capable of facilitating the transaction. This includes the right property type, quality of building, credit profile, structure, size of loan, and geographic area. These are great questions to ask upfront. Some lenders will even post samples of recent deals on their websites as a guide.
Obviously, besides making sure you are submitting your loan application to a lender that says they want it, it is also important to vet lenders. Do they really have experience in this niche? What is their reputation for actually funding loan requests versus just taking applications? What do their fee structures and borrowing costs say about their organization? What are others saying about them online? How do other industry professionals feel about the job they are doing?
Finding a Great Loan Officer
Experienced real estate investors and affluent buyers that have acquired numerous properties in the past know that the lender is only part of the equation. The same goes for real estate agents, or any other professional institution. Who your individual loan officer is will make all the difference. How good this individual is at their job, how hard they are ready to work for you, and their work ethic will determine how successful your loan application is.
It is the loan officer that has to go to bat for you, package and present it in the best way, fight for your interests and push everyone involved to get it closed on time. Their position is so important that you will want to vet loan officers, as well as lenders. Look for those that are motivated, hungry, knowledgeable, and will tell you the real deal – even when it isn’t what you want to hear.
Commercial vs. Residential Loans
Many fear that getting a commercial mortgage loan is harder and more complicated than obtaining a residential home loan. This isn’t necessarily true. In fact, despite the misconceptions, quite the opposite is true. It is a different process, however.
Most will find that commercial underwriting makes a lot more sense. It often isn’t bound by the quirks of residential lending. One of the most notable differences in decision making is that it is asset and income based, versus putting the weight of decision making on personal credit.
While the upfront is very minimal in residential borrowing, commercial lending is almost the opposite. Lender’s minds are typically 90% made up on the strength of the executive summary. If they hate it, don’t expect your application to get far. If they love it, it will go to a panel or underwriter. Providing you can supply the required effort, the process is normally smooth. However, due diligence is a little different. Appraisals use different factors and can be more expensive, and inspections can include environmental inspections – in addition to traditional ones.
Creating an Executive Summary to Secure Your Loan
The key to scoring a great commercial mortgage loan is a great executive summary: a short summary of the deal in question. It will include who is involved, their experience, basic information about the property, and the transaction, and how funds will be used. A little selling can be good, but keep the data realistic and factual if you expect to be taken seriously. If you aren’t sure what this should look like, do some research or hire a writer that has experience.
The Quirks of Commercial Borrowing
Some of the most notable quirks associated with commercial loans are the different terms and features. The key to success is to carefully read the fine print before closing and ensure you understand it all.
