Small commercial hard equity loans: Frequently asked questionsGary Opper, CPA, CFPCommercial hard equity mortgage lenders
What is the definition of small commercial hard equity
For the purposes of this article, small commercial hard equity
loans are loans on commercial real estate that are valued between
$100,000 and $500,000. Why pick such a narrowly defined range?
First, the typical mortgage broker will see this range for most
commercial loans. Second, properties valued between $100,000 and
$500,000 tend to finance and sell quicker than lower- or
higher-valued properties. Third, every additional cost (e.g.,
attorney fees, carrying costs and real estate commission) is higher
as a percentage of value on a lower-valued property as compared to
a higher-valued property. Fourth, property valued over $500,000 has
a smaller pool of buyers.
What types of properties do commercial hard equity
lenders like to lend on?
Commercial hard equity lenders like to lend on apartment buildings,
medical buildings, office buildings and retail centers. However,
some commercial hard equity lenders will lend on mixed-use
properties, industrial properties, hotels/motels, mobile home
parks, vacant land, restaurants and adult living facilities. But
most commercial hard equity lenders will not lend on dumps, gravel
pits, properties with potential Environmental Protection Agency
issues (e.g., gas stations, auto repair shops and dry cleaners) and
What are the advantages of a commercial hard equity
Some of the advantages of a commercial hard equity loan are:
• Speed—Commercial hard equity
loans can be closed quickly. Very little, if any, information is
verified. Little documentation is needed, as compared to
• Little documentation or
explanations—Since approval is based only on the
real estate, a commercial hard equity borrower may not need to
explain credit, financial, family or other problems.
• No verifications—Commercial hard
equity loans do not require verification of income, employment,
Social Security benefits, gifts, down payments, cash to close or
other matters that are required with traditional financing.
• Flexible—Generally, commercial hard
equity lenders do not have published interest rate sheets. Their
rates, pricing and terms are matched to a borrower's needs. This is
the opposite of a traditional loan, where a borrower must fit into
a traditional lender's mortgage program.
• Client profile—A commercial hard
equity borrower is less demanding and easier to please. Therefore,
the loan is easier to close. A borrower wants the money from the
loan immediately. Terms, interest rates, fees and points are
secondary. Typically, a borrower does not rate shop.
What are some ways to find mortgages?
Direct mail, Yellow Pages and newspaper advertisements are some of
the more popular ways to attract business. The most productive and
least expensive way to find mortgages is referrals from other
professionals, your vendors and your sphere of influence.
Which professionals encounter commercial property
Professionals who tend to interact with commercial property owners
include bankers, mortgage brokers, commercial real estate brokers,
Certified Public Accountants, attorneys, developers and commercial
insurance agents. You may want to network with these professionals
in their trade associations, such as the builder's association, the
chamber of commerce, business clubs, networking clubs, civic clubs,
In what cases would a borrower need a commercial hard
Clients need commercial hard equity loans in situations such as
bankruptcy, business failure, credit problems, death of a borrower
or partner, family events, foreclosure, "can't wait" transactions,
repairs or renovations needed on a building, negative cash flow on
property, tax liens, unreported income, turnaround situations and
work-out situations. These items are the predominant reasons that a
commercial hard equity loan will solve a client's current financial
situation. Generally, a borrower in one or more of the above
situations is a good candidate for a commercial hard equity
mortgage loan. These and other situations are fertile areas for
your marketing to generate commercial hard equity loans.
What are some market categories that have substantial
According to the Internal Revenue Service, some other market
categories that are prone to having substantial unreported income
include the auto body and repair industry, bars and restaurants,
beauty shops and barbershops, bed-and-breakfast inns, construction
industries (painting, carpentering, plumbing, electricity,
landscaping, bricklaying, physical laboring, roofing, etc.),
entertainment industries (singing, dancing, comedy, acting, etc.),
gas retailers, import/export businesses, miscellaneous (homecare
nursing, tutoring, housekeeping, babysitting, car washing,
gardening, etc.), mobile food vendors, music industry associates,
retail stores, taxicabs, trucking and used car dealers. A list
broker will be able to supply you with names of people in these
What about a borrower who just wants money
A commercial hard equity loan is appropriate for a borrower who
just needs money quickly. If a borrower has an opportunity that
cannot wait for an approval from a traditional lender, then a
commercial hard equity loan is appropriate.
Why are closing costs and interest rates
Borrowers pay for the ability to close a loan quickly and without
much documentation. These loans are for borrowers who need to close
quickly, don't have the time to go to a bank, do not have the
ability to borrow from a bank because of financial problems or lack
adequate financial data to satisfy a bank.
How do I sell expensive money?
First, emphasize the value of your time and service. Second,
explain that a loan is cheaper than a partner or venture
capitalist. Third, explain the lender's streamlined due diligence,
as compared to a traditional lender. Fourth, explain the negative
impact of the current alternatives—foreclosure, lost
What do I look for in a commercial hard equity
Your commercial hard equity lender must be fast, flexible and a
First, a commercial hard equity lender must be fast. As with all
borrowers, a commercial hard equity borrower wants his loan closed
yesterday. A professional commercial hard equity lender has the
time and experience to quickly see a borrower's real property in
order to quickly approve the loan.
Second, a commercial hard equity mortgage lender must be
flexible. A typical traditional mortgage lender's investment matrix
or grid will not work. A commercial hard equity lender must be
flexible and adaptive to the uniqueness of each transaction.
Third, a commercial hard equity lender must be a direct lender.
A direct lender lends his own money. A lender acting as a mortgage
broker must consult with the actual lender. A direct lender will
have immediate access to the funds a mortgage broker needs to close
commercial hard equity transactions quickly.
What terms should I expect?
Usually, loan-to-values (LTV) between 50 percent and 65 percent are
available on commercial real property. For vacant land, the maximum
LTV varies from 30 percent to 50 percent. A commercial hard equity
land lender is relatively rare.
The interest rates vary from as high as the maximum interest
rate allowed by the state where the real property is located to an
interest rate as low as several points above the non-conforming
Most loans are for terms of two or three years. The borrower's
goal with a loan is to achieve the immediate benefit and then
progress to less expensive financing, either with debt or
What do I need to submit to receive a
For a simple project, a lender will need, at minimum, the address
of the subject property, the current rent roll, an estimate of the
property's value and the loan amount request.
For anything else, a loan summary should be submitted, outlining
the use of funds and telling the story of the project. The story
should include the answers to the who, what, when, where, why and
how questions. The lender may have an application for you to
You should suggest some reasonable terms to your commercial hard
Can a commercial hard equity loan be a first, second or
Most commercial hard equity lenders make only first mortgages.
How do I increase my commercial hard equity brokerage
Seek out professional direct commercial hard equity mortgage
lenders. Talk with them and determine their general underwriting
criteria and terms, conditions and rates.
Set up procedures today so that all of your turned-down loans
are analyzed as potential commercial hard equity loans. This
includes loans that are turned down immediately by your mortgage
employees and lenders and loans that go bust at the closing
Let your mortgage colleagues know that you are now doing
commercial hard equity loans. Your mortgage associates may be able
to introduce you to a commercial hard equity lender in your
Continue with your successful advertisements, whether they are
in the Yellow Pages, newspapers, community papers, radio,
television or direct mail. In your future advertisements, indicate
that you do commercial hard equity lending. Each community
addresses this differently, so study ads from your area to see how
a commercial hard equity loan is addressed. Examples of how to
phrase an ad include "Hard equity loans," "Bad credit OK,"
"Bankruptcies OK," "No credit OK," and "No credit turndowns."
Seek out potential types of clients who may need commercial hard
equity loans. (See "In what cases would a borrower need a
commercial hard equity loan?")
Seek out property owners in industries that may be specifically
interested in your commercial hard equity loan programs. (See "What
are some market categories that have substantial unreported
Contact professionals who meet commercial property owners. (See
"Which professionals encounter commercial property owners?")
Commercial hard equity lending will increase your income.
Ignoring this facet of the industry is equivalent to leaving money
on the table. Also, as a professional mortgage broker, you must
always try to meet the needs of all types of borrowers.
Gary Opper, CPA, CFP is the president of Approved Financial
Corporation and is past president of the Florida Association of
Mortgage Brokers Miami Chapter. He may be reached at (954) 384-4557
or e-mail firstname.lastname@example.org.