SMALL COMMERCIAL HARD EQUITY LOANS: Frequently Asked Questions

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1 SMALL COMMERCIAL HARD EQUITY LOANS: Frequently Asked Questions By Gary Opper, Approved Financial Corporation, Weston, FL Fax 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 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/or sell quicker than lower or higher valued property. Third, every additional cost (attorney fees, carrying costs, 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 Property Do Commercial Hard Equity Lenders Like To Lend? Commercial Hard Equity Lenders like to lend on the following: Apartment Buildings Medical Buildings Office Buildings Retail Centers Some Commercial Hard Equity Lenders will lend on the following: Mixed Use Properties Industrial Properties Hotels/Motels Mobile Home Parks Land Restaurants Adult Living Facilities 1

2 Most Commercial Hard Equity Lenders will not lend on the following: Dumps Gravel Pits Properties with potential EPA issues (gas stations, auto repair shops, dry cleaners) Religious Institutions What Are The Advantages Of A Commercial Hard Equity Loan? Some of the advantages of a Commercial Hard Equity Loan are: FAST - 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 the approval is based 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 when 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 is referrals from other professionals, your vendors and your sphere of influence. 2

3 Which Professionals Encounter Commercial Property Owners? The following professionals interact with Commercial Property Owners: Bankers Mortgage Brokers Commercial Real Estate Brokers CPAs Attorneys Developers Commercial Insurance Agents You may want to network with these professionals in their trade associations. Some of the associations include 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 the following situations: 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 Work-out situations These items are the predominate 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 areas and other situations are fertile areas for your marketing to generate commercial Hard Equity Loans. 3

4 What Are Some Market Categories That Have Substantial Unreported Income? According to the IRS, the following are some other market categories that are prone to having substantial unreported income: Auto body and repair industry Bars and restaurants Beauty and barber shops Bed and breakfast inns Construction industries (painter, carpenter, plumbers, electricians, landscapers, bricklayers, laborers, roofers, etc.) Entertainment industries (singers, dancers, comedies, actors, etc.) Gas retailers Import/export businesses Miscellaneous (home care nurses, tutors, housekeepers, baby-sitters, car washers, carpenters, plumbers, electricians, gardeners, etc.) Mobile food vendors Music industry associates Retail stores Taxicabs Trucking 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 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 A lack of adequate financial data to satisfy a bank. 4

5 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 compared to a traditional lender. Fourth, explain the negative impact of the current alternative - foreclosure, lost opportunity, etc. What Do I Look For In A Commercial Hard Equity Lender? Your Commercial Hard Equity lender must be: Fast Flexible 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 to 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 nonconforming rates. 5

6 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 a 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 "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? 1. Seek out professional direct Commercial Hard Equity mortgage lenders. Talk with them and determine their general underwriting criteria, general terms, conditions and rates. 2. Set up procedures today so that all your turned down loans are analyzed as potential Commercial Hard Equity Loans. This includes loans that are turned down immediately by your mortgage employees, loans that are turned down by your lenders and loans that go "bust" at the closing table. 3. 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. 4. Continue with your successful advertisements, whether it is 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 include, Hard Equity Loans, bad credit - OK, bankruptcies - OK, no credit - OK, and no credit turndowns. 5. Seek out potential types of clients who may need Commercial Hard Equity Loans. (See the question, "In What Cases Would A Borrower Need A Commercial Hard Equity Loan?") 6

7 6. Seek out property owners in industries that may be specifically interested in your Commercial Hard Equity Loan Programs. (See the question, "What Are Some Market Categories That Have Substantial 'Unreported Income'?") 7. Contact Professionals who meet commercial property owners. (See the question, "Which Professionals Encounter Commercial Property Owners?") Commercial Hard Equity Lending will increase your income. You must not leave 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 is President of Approved Financial Corporation, Weston, Florida. Approved Financial Corporation is a licensed mortgage lender. Mr. Opper has been a Florida Hard Equity Mortgage Lender and National Note Buyer since Also, he does mortgage consulting. He has a CPA and a CFP license. Opper is past president of the FAMB- Miami Chapter and the FICPA Gold Coast Chapter. Opper is a member of the NAMB, FAMB, AICPA and the FICPA. Mr. Opper is available to speak to your group. Please contact him to arrange a speech for your event. He may be reached at (954) , fax: (954) , or approv01@aol.com. Gary Opper. All Rights Reserved This is the complete text of a speech given at the Gold Coast Chapter of the Florida Association of Mortgage Broker's Annual Commercial Lender Roundtable. Mr. Opper is available to speak to your group. Please contact him to arrange a speech for your event. 7