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Mortgage technology and beyond: Loan Analyzer and Comparator

Oct 19, 2005

Understanding commercial mortgagesBrian L. Peartcommercial mortgages, diversifying income Welcome to the world of commercial mortgages. With the following article, I hope to offer some insight to the residential loan officer who is venturing out into the world of commercial mortgages. I also intend to introduce you to some of the differences between residential and commercial loans, and hopefully help you to be more profitable in your quest for diversifying your income through commercial loans. I will endeavor to teach you the who, what, when, where, why and how of commercial mortgage loans. Knowledge is power, and my goal is to give you that knowledge - accurate knowledge. And so, let's begin ... Who? Who lends the money in the commercial realm? This is the first and possibly most important difference. As residential brokers, you sell your loans to a large lender or bank or some financial institution whenever you do a loan but the money is not really lent by that institution. Ultimately, they sell the loan to Fannie Mae or Freddie Mac and are reimbursed. They keep the servicing rights, and Fannie or Freddie then bundle all of those loans and pass them through to investors as mortgage-backed securities. In other words, the bank is not really lending their own money. In the commercial realm, most loans are done by banks, with their own money. They take the money on deposit and loan it out to different companies. There is no giant waiting to reimburse them. If that loan defaults, the bank is stuck (unless they can sell the property for a profit). Because of this, they are more selective than they would be on residential loans. But that's not all. Eighty percent of all businesses fail within two years, and if someone does fall into financial difficulty, they will let their commercial investment falter, rather than leave their wife and kids without a house to live in. Commercial loans are investments, and we all know the rules are stricter. Because each piece of property is completely different, commercial deals are not hard and fast; there are no 28/36 ratios here. Simply put, the property is more important than the borrower. If you find an excellent borrower with a bad property, no one will buy the loan. The good news is that if the deal is good, there is more than enough commercial money available. Banks want to lend, they're just more careful when it's their own money. There is a bundling of commercial mortgage-backed securities, but that market is nothing compared to the residential side, and even then, the property and deal is still specifically looked at. What? What takes commercial deals longer than residential loans to close? Rare is the commercial loan that closes in less than a month, and the rate for those types of deals are more like hard money. Small commercial loans will usually take two months and larger ones can take as much as four to six months! Many factors go into closing a commercial deal let's start with the appraisal. It will rarely be ordered before the loan is approved and the borrower has committed, which could be several weeks into the deal. Once ordered, an appraisal on a commercial property will often take a month or more, depending on the size and usage of the property. Ultimately, the property's value will be determined by its cash flow. The appraiser of a commercial property has to get the financials on the property and compare it to similar properties in the area. If my apartment complex is 70 percent rented and the average complex in the area is 75 percent rented, it will affect my appraisal. How the property has been managed is important. How quickly the appraiser can get that information is important. The appraiser must often contact an owner and get information directly from them, and it is rarely as easy as pulling up an MLS listing. The broker often can drag the file because they do not get the information needed up-front. If my apartment complex is running 30 percent vacancy compared to most places running 25-percent, I need to explain that reason. Most brokers will send a deal with a residential loan application filled in, a credit report and two-years worth of tax returns and think the loan will be approved. When asked for the stuff that is really needed three years of operating statements, business plans for the property, etc. they balk at getting it. The loan will never get approved just based on tax returns and a credit report. Why? Because the property is the most important factor. If you get the right documents in a timely fashion, your loan will move through much quicker and have the best chance of getting approved. And of course, a loan could drag because of a borrower dragging on getting needed information ... but we're used to that, aren't we? When? When do I get paid? Most commercial loan fees are due and payable at time of commitment. In other words, the customer signs into a certain rate and structure, and you get a commitment from a bank or entity for it. However, it is usually not collected until the closing. Herein lies another danger with commercial loans. With residential loans, the package comes from the lender, your fees are there, and everything is fine. On the commercial side, the customer has much more clout. Often, it is no problem, but sometimes, they can cut you out of the deal. The customer is also looking out for themselves, and they will beat you up on fees and threaten not to close. They may tell the bank they do not want to pay the brokers fees on the closing statement; they may try to find out who you are using and go directly to them anything to avoid paying an extra broker's fee. It may sound like I am being overly negative, but I am not. You should either deal with your existing customers, or work with a company who has already established some relationships (and acquire some legal expertise to protect your fees). Where? Where can you get commercial deals? They are everywhere! All you need to do is mention that you do commercial deals and people will immediately begin talking. It is a great hook for approaching real estate agents. Just drive through any area and look at the properties. With rates this low, most properties can be refinanced! The commercial mortgage market is huge, and there is considerably less competition than in the residential market. It's great residual income! Why? Why do commercial loans? If they are so deal-specific, take longer to close, and include more difficult customers who are trying to get out of paying you, why bother? It's simple. Commercial loans, done right, can be profitable. They give you an edge over other brokers, and it's smart to diversify your sources of income. Most importantly, it gives you a natural hedge against rising rates! What do I mean? Commercial activity increases as business and the economy improves, and consequently, stocks do better and our rates go up, slowing down refinance business. As that happens, the commercial marketplace heats up. How? How do you get started? Two ways one quick, the other longer, but both have merits. The longer way is to take all the classes and instruction you can find on commercial loans and try to place them yourself. Although you will keep more of your money that way, it will take years for you to get really good at commercial loans. The quick way is to pick a company that you will work with. They should have contacts in several states, but also access to Wall Street money and nationwide commercial lenders. They should have experience doing commercial loans and not be tied to one lending source. To start, refer the deals to them, and let them do the work while you watch and learn. You will pick up the rules as you go along and end up becoming more knowledgeable in a shorter time-frame. You will initially make less, but you will close more loans, have less headaches, and ultimately, be able to branch out on your own. Commercial loans are picking up right now, which means that low rates are close to being over. Begin now to diversify your income and tap into this growing market! Brian L. Peart is president of Nexus Financial Group Inc., and its commercial division, Commercial Capital Ltd. He is a national trainer and editor of Top Producer magazine. He may be reached at (866) 355-1244 or e-mail [email protected].
About the author
Oct 19, 2005
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