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Jan 24, 2007

The commercial corner: Qualifying small-commercial properties: Mike BoggianoMike Boggianosmall-commercial properties Q: I recently started to offer small-balance commercial loans on multi-family properties. As I look to grow the commercial part of my business, how can I be sure I'm asking the right questions to qualify other properties? A: Your question is on the minds of many other crossover mortgage brokers who want to ensure they're gathering the right information while upholding the borrower's confidence in them as experts. As you seek out deals beyond multi-family properties (mixed-use, office, retail, industrial, etc.), consider that you will also need to expand your knowledge of nuances for each property type. A questionnaire is a valuable tool to help guide brokers' initial conversation with borrowers. You'll gain a clear understanding of the borrower's objectives while literally taking note of key information to match his scenario with the best lender and program. Many industry sales trainers and some lenders provide such questionnaires (ask about marketing tools or sales resources). Here is a list of sample questions to help brokers extract relevant information from small-commercial borrowers when evaluating potential deals. Keep in mind that each lender program is different, and these questions serve as a general guide. - Is the property owner-occupied or an investment? - What is the expected holding time for this investment? - What type of property is it? - What is the current use of the property? - Does it require rehab? - If used as something else previously, are there any environmental concerns? - What is the current condition of the property? - What is the tenant mix of the property? - How many units does the property contain? What is the occupancy level? - Are there internal and external pictures available? (Note that it is always beneficial to take a firsthand look at the property, especially when photos are not available.) - How was the value of the property derived? Is it supportable? - What is the balance due on the mortgage? - What is the history of the mortgage payments? - When is the mortgage due? - Are the most current operating statements and rent roll available? Are the past two years of operating statements available? - Are the borrower's current and past two years' tax returns available? - Is there a credit report available? What is the borrower's credit score? - What is the structure of the ownership entity (individual or corporate entity)? In addition, it is helpful to gather additional insight based on specific scenarios. Here are some examples: For a purchase - Is the property listed by a real estate professional? Generally speaking, this indicates a true arms-length transaction as opposed to a private sale, where the purchase price may not be reflective of true market value. - Is there a purchase contract in place, and do you have a copy of it? When does it expire? This is necessary to order the appraisal; knowing the expiration helps you address meeting the timeframe. For a refinance - When did they purchase the property and for what price? - How much do they owe and what needs to be paid off? - How much do they think the property is worth? - What is their motivation for the loan? Getting cash out, paying off a private mortgage, paying off a balloon that is coming due and making repairs to the property are common reasons for a borrower to refinance. For mixed-use properties - How much of the rental income is from residential and how much from commercial? - What is the makeup of the commercial units (stores, offices, restaurants, bars, etc.)? - What percentage of the market rental income of the property is from the borrower's business? Lenders may categorize properties differently based on this percentage, which can also determine available product features. For office, retail, warehouse and industrial properties - What is the square footage of the property? - What are the lease terms? Leases could be gross, modified gross or triple net. Gross is one in which the landlord is responsible for all the costs of maintaining the property, whereas triple net requires the tenant to pay for property taxes, insurance and maintenance, in addition to the base rent. - Does the purchase price include any non-real estate assets? For example, restaurants or bars may include a liquor license or furniture, fixtures and equipment. - Is any manufacturing being done on site? Are chemicals handled? When was the property built? These answers are helpful in assessing any environmental concerns. Properties older than 1986 were not subject to environmental regulations, and therefore typically warrant a more in-depth environmental evaluation to protect the borrower from any unknown risks. The answer to the above and similar questions should reveal valuable information about the subject property, which will assist you in moving the transaction forward. More importantly, you'll understand the borrower's goals and objectives with regard to investment strategy, and know the level of documentation he can provide. Collectively, this information helps you personalize your approach and place the client with the appropriate lender and program. Mike Boggiano is senior vice president, national sales manager for Silver Hill Financial LLC. He may be reached by phone at (877) 676-1562 or e-mail [email protected].
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