Many investors are looking to jump into the world of commercial real estate after having success on the residential side, but don’t have experience, knowledge, or an idea of what it takes to close a commercial deal. While there is plenty of money available for commercial deals out there, lenders (be it conventional, hard money or private lenders) are being more conservative on what they fund due to the large amount of deals that they can chose from. It is important to know that you have a few items covered when you start looking at deals that you want to take down.
Many commercial lenders will want a few items or questions answered before they spend their time and energy on your deals. While you can often be a bit more flexible on commercial deals, these questions can help give you an idea of whether or not your deal has any legs to stand on.
1. Does the buyer have good credit?
Ok, You probably don’t need me to tell you that times have changed and no area of real estate or the economy is excluded. In times past, the primary borrower’s credit would not necessarily make or break a deal because the property qualified on its own merit. If it was a good property that fit the program guidelines and you could show cash flow, your deal was good to go! Well, that’s all over now.
Not only does the property need to qualify but now you or your co-borrowers do as well. If you as a primary borrower have low credit scores, it will be difficult, if not impossible to get to the closing table. Now if the seller is willing to carry financing for a period of time, this may not be as important. But if you ever plan to get long-term conventional lending to refinance out the seller, your credit score is going to come into play. For many quality loans, a score of 680 is required but a a 700+ score is preferred. While this is difficult for many investors due to their use of credit volume, there are many credit repair firms that can help you boost your score for a nominal fee when you consider what a poor credit score can cost you over time.
2. Does the buyer have down payment money?
While the past history of commercial lending has allowed for 100% financing, no documentation loans, those days are gone. Buyers must have some skin in the game these days. You should expect to have somewhere between 10-20% down but SBA (Small Business Administration) can go to 90% in most cases. If you end up going with hard money, expect them to lend up to 65% and bridge loans can go up to 75-80%. Make sure that you discuss your options with a seasoned commercial lender to discuss Loan To Value amounts depending on your area and the programs that are available.
3. Does the buyer have sufficient, documented experience?
This isn’t a new category to worry about but it is certainly something that lenders are going to ask prospective buyers. If the subject property is an apartment building, the lender is going to want to see some type of experience in owning apartment complexes or see someone on the borrower’s team that has experience in running them. They borrower will also consider the location of the property in proximity to where the borrower lives. Having an experienced team behind you is something that rookie investors have problems with and can sometimes lead to hiccups in closing the loan. Owner occupied commercial property will require that the borrower has significant training and experience in their line of work as well.
4. Does the buyer have sufficient, documented net worth?
In today’s market, cash is king! Commercial buyers need to provide up to date financial statements. Lenders are not only looking for experience bu they want to see net worth to make sure that the borrower can weather the storms during the low points. Many times the lender will want to see a net worth equal to the amount of the loan. Many times if the down payment will wipe out the liquidity, you will have problems making it to the closing table.
5. Can the buyer document income with full tax returns?
As I mentioned earlier, you have to have some skin in the game with today’s commercial lending environment. Along with that, the buyer needs to be able to document their income with full tax returns for owner occupied properties. Full financial statements on the property along with with up to date rent rolls will be required on investment properties.
6. Is your buyer cooperative, respectful and willing to accept that today’s lending environment has changed?
While most people are very understanding, most borrowers and sellers just don’t understand that the market and lending environments aren’t what they used to be. Many borrowers get upset at the fact that lenders and banks drag on the approval process, constantly asking for more documentation, delaying the closing, and then finally deciding not to fund the loan. This leaves buyers with a bad taste in their mouths along with sellers who get frustrated and upset at the buyers. Many times this could have been aleviated by having the bank give a “yes” or “no” on the front end instead of dragging things on. This is definitely a lender’s market as they are being extremely picky about what they chose to fund, so working with a seasoned and experienced commercial lender who has and is in the game on a daily basis is critical. A quality commercial lender is someone who has ties to other lenders along with private and hard money lenders who can step in to quickly fund deals that go south otherwise.
It’s important that you keep these guidelines in mind when looking at commercial deals. Talk with your commercial lender and don’t be afraid to discuss with them any hiccups that might happen along the way. Be open minded to what they have to tell you, as they can often save you thousands of dollars in due diligence fees along with days, weeks, and months in time.
Many times, they will have solutions to your problems and questions that are outside the box or creative in ways that realtors and other professionals won’t think about. It’s a great market out there, and the only way to take advantage of what’s going on is to talk to people and make offers on properties! There are plenty of distressed property owners and lenders are available to lend on the true deals. Don’t settle for a skinny deal!