by Leo Gluck
We’ve all had to change the way we do business over the past few years, and while it has been challenging,there is something to be said for expanding our horizons. The more we know as originators, the better equipped we are to help our clients. One such way that we can do this in the coming year is to broaden our scope of expertise to include commercial hard money lending.
However, if there is one thing that you need to be prepared for when deciding to include commercial hard money lending into your repertoire, it’s that hard money lenders are not your typical lenders. On the contrary, they are typically individuals, or partnerships, or even money pools or corporations. To that end, they expect a higher ROI on their investments than traditional lenders. Think about it, wouldn’t you expect a greater return on your own money, since you’re taking a big risk? That’s exactly how commercial hard money lenders feel, and their reasons are justified.
Consider that commercial hard money is far more complex than residential hard money, and for that reason investors are far more prone to considering all aspects of the loan. That is, instead of merely taking into consideration the borrower, much greater emphasis will be placed on examining the actual property. Couple that with the fact that there is often something askew with the property, or unusual about the borrower, and it adds up to a complicated transaction.
Borrowers requiring residential hard money loans may have any number of reasons why they need the loan. Unemployment, family emergencies, medical issues are some of the typical reasons why a borrower may need a hard money loan. This is in juxtaposition with commercial hard money, whereby the property’s income has changed
or there has been a change in the use of the property. Of course, judgments, liens, bank rejections and other unusual circumstances are also reasons why an owner may opt for a commercial hard money loan. That’s why it is imperative that as an originator, you thoroughly understand the reason the borrower needs this loan.
There are other things you simply must know before venturing into the world of commercial hard lending. First, understand that the equity must be there. Standard guidelines include 70% LTV on residences, 65% on apartment complexes, and down go the percentages for owner –occupied, industrial, special use, with typically a 50% LTV on land.
With equity playing such a big role in commercial hard money, it’s not surprising that the appraisal will be a deciding factor when obtaining a commercial hard money loan for your client. Frankly, the LTV will determine the risk to the investor, making the need for an accurate appraisal so important.
Naturally, the exit strategy or loan repayment will be of utmost concern for a commercial hard money lender. They will insist that the borrower have a realistic plan for repaying the loan, or the loan will likely be rejected. Is the loan just temporary? Your lenders will want to know. As such, when working with borrowers, a
detailed letter explaining the intricacies of why the loan is needed should be drafted and submitted to the private investor, partnership or corporation.
While commercial hard money lenders are in business for a reason (because they are often necessary, as without them, the borrower runs the risk of losing the property), they will still expect you to be diligent in providing precise paperwork on behalf of your client. This will – at minimum – include the standard credit check, application, income garnered from the property, current title, expenses of the property and, of course, photos. Submitting an application that leaves any of these items out will almost certainly keep your client from obtaining their loan. Today, many lenders will also insist on inspecting the property personally while considering the location, other businesses in the area, and even environmental reports.
This may sound a little overwhelming, but you’ll learn as you go along. The good news is that this can be a very lucrative branch of lending to add to your areas of expertise. You’ll just need to make sure that you think of the loan in terms of what you’d be looking for if you were to lend your own hard-earned cash. That means that the more information you can provide to the lender from the get-go, the greater the likelihood that the loan will be approved. Moreover, the more thorough you are in acknowledging just what lenders are looking for, the faster your loan will close, earning you a quick commission and keeping your client solvent with their commercial property.
Leo Gluck is president of Commercial Mortgage Corp. in San Mateo, Calif., working nationwide in commercial wholesale and retail since 1981. Gluck was past president and state director of the San Francisco Peninsula California Association of Mortgage Brokers chapter. He has trained and managed hundreds of agents for more than 25 years in commercial loans. He may be contacted at (800) 538-5626 or firstname.lastname@example.org