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Appraisal "re-form" and the mortgage industry

National Mortgage Professional
Jun 26, 2006

Small commercial hard equity loans: Frequently asked questionsGary Opper, CPA, CFPCommercial hard equity mortgage lenders What is the definition of small commercial hard equity loans? 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 religious institutions. What are the advantages of a commercial hard equity loan? 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 traditional financing. • 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 owners? 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, etc. In what cases would a borrower need a commercial hard equity loan? 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 unreported income? 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 occupations. What about a borrower who just wants money quickly? 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 high? 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 opportunities, etc. What do I look for in a commercial hard equity lender? Your commercial hard equity lender must be fast, flexible and a direct funder. 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 rates. 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 equity. What do I need to submit to receive a quote? 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 complete. You should suggest some reasonable terms to your commercial hard equity lender. Can a commercial hard equity loan be a first, second or third mortgage? Most commercial hard equity lenders make only first mortgages. How do I increase my commercial hard equity brokerage business? 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 table. 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 area. 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 income?") 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 [email protected]
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