By Leo Gluck
During the last couple of years, an increasing number of loan originators have sought another revenue stream, a niche or other source to complement their regular residential business. Many have considered commercial origination as potentially viable. As a veteran of the commercial lending arena, I offer this succinct advice—get involved if you’re willing to make a long-term commitment. In today’s challenging marketplace, commercial lending isn’t for the timid.
Following is an overview of primary points to help you decide if commercial originating is right for you, right now.
There are several ways you can “learn the ropes” of commercial originating. The Certified Commercial Investment Member (CCIM) Institute (www.ccim.com) offers a variety of courses in commercial lending, along with the CCIM designation. The National Association of Mortgage Brokers (www.namb.org) and Mortgage Bankers Association (www.mbaa.org) also offer commercial lending classes or workshops in commercial lending.
You can also contact a commercial lender and ask to “shadow” one of their reps. Some lenders will provide educational materials as well.
Another option is to team up with an originator who is already successful on the commercial side; on-the-job training is often the most beneficial.
Of course, commercial originating is vastly different than residential. For example, commercial borrowers are generally more sophisticated than residential customers. In addition, commercial lenders have their own language and terms that you must learn. Commercial appraisals are expensive and typically not handled upfront as they are in residential. Commercial lenders often consider the property’s features to be more important than the borrower’s qualifications.
It’s no surprise that the industry slump and overall economic conditions have emphasized the difficulty in commercial originating. The most significant difference now is the even stricter underwriting guidelines and the specific lender requirements. For example, whereas commercial customers previously could be accepted with a 600 FICO, they now need at least 700. In addition, debt service coverage ratios are more conservative, loan-to-values have been reduced, and CAP rates have increased.
Often referred to as “in the box” lending, commercial lender criteria varies widely, so you need to carefully understand what’s required in each case. Lenders are carefully examining both property and borrower; tax returns, real estate holdings and the borrower’s ability to own and manage commercial properties are under greater scrutiny. You may think you have the ideal property to match lender guidelines, but end up talking to five lenders before you get one positive response.
You also will learn that commercial lenders place an even greater emphasis on relationships. In many cases this will mean that the lender requests/prefers borrowers to have their corporate and personal business with them as well. So you will need to explain to clients that they will need to be prepared for this.
Although this is a more challenging time for commercial originators, there are opportunities to make your investment of time and resources worthwhile. A good place to start is with two- to four-unit residential properties, which are similar to commercial multi-family deals. Once you’ve enjoyed some success at that level, you can move to five- to 20-unit multifamily properties. After closing a few apartment building transactions, you might take on mixed use, office or other income properties. Other viable markets are the commercial REOs and short sale properties. The processing and underwriting guidelines will vary for each property type
There has been a drastic reduction in the overall number of commercial lenders. Most are currently concentrating on properties under $5 million; a few are also handling larger loans. In addition, the Small Business Administration (SBA) and United States Department of Agriculture (USDA) programs are very active. The SBA is aggressively seeking opportunities to help new and existing business owners; their 7A and 504 loan programs are currently the most popular. The USDA has several rural borrowing programs in place. Also, you’ll find that hard money lenders currently are receptive to the right commercial property and borrower profile, as are life insurance companies, so those options could be even more promising, depending on your client’s situation.
There are several places to obtain your first commercial deals. For example, contact your previous residential customers to see if any of them might be commercial prospects. Send an e-mail or letter advising that you are able to help with small to mid-size commercial deals. You can also see if your CPA and financial planner partners know of any clients with an interest in commercial properties. One of my favorite marketing techniques is simply cold calling property owners to discuss their commercial mortgage needs.
Once you have some experience on the commercial side, be sure to promote this new capability on your Website, brochure, business card and other marketing material.
When first starting out in the commercial lending market, I caution you to be wary of unscrupulous lenders trying to take advantage of customers. They are the ones initially overpromising on funds available and transaction time frames, and charging excessive upfront “service” fees. If in doubt, you can check references; ask for a list of the loans the lender has closed. Your loan originator colleagues will also share their insights regarding lenders with whom they have worked.
If you’re still interested in pursuing this challenging, yet potentially rewarding niche, here are key steps:
- Learn the “how to” of commercial lending. Attend a seminar, read a book, and/or get on-the- job training with a lender rep or other expert.
- Develop a master list of commercial lenders and review their guidelines.
- Carefully evaluate your local market. There may be some areas where commercial properties are especially appealing.
- Contact previous customers/others to get obtain initial commercial prospects. Start with an “easier” deal such as a two to four- unit property.
- Approach lenders that seem to match your customers’ needs. Be willing and able to meet the lender’s unique “in the box” requirements.
- Evaluate opportunities with the SBA (www.sba.gov) and USDA (www.usda.gov).
- Be patient. Commercial loans usually take twice as long as residential loans to close. Educate customers as to the time frames they can expect.
If you’re looking at commercial lending as a future growth market, you need to determine if you’re willing to make a long-term commitment. This isn’t an easy market to enter, especially in today’s challenging environment. However, there are some definite opportunities that will make the challenge worthwhile.
Leo Gluck is president of Commercial Mortgage Corp., San Mateo, Calif.