Go Commercial – How To Cash In On A Growing Market

To add a little oomph to business these days, LO’s are turning away from the residential realm and focusing their efforts on potentially bigger fish – the commercial arena. Find out the differences between the two markets – from documentation to financing – and why you should line up to tap these unchartered waters. As a bonus, a commercial originator in action shares his words of warning before stepping into bigger territory.

With the subprime fallout, amped up regulation and a slowing residential market, many originators are feeling the squeeze of increased competition and fewer deals.

“Many brokers are making the transition into small commercial lending as a way to serve their existing clients better, and to branch out into a growing market,” said Reed Larsen, vice president of Homeland Mortgage Inc. and Homeland Funding Corp. “Many mortgage brokers have worked hard to build good relationships with their clients over the years, particularly with small business owners and self-employed borrowers who need the kind of expertise and the level of service that good brokers provide. These entrepreneurial clients often ask their brokers about commercial loans, and brokers would rather close those loans than send their hard-earned clients down the road to a competitor.”

What’s the difference?

While both residential and commercial brokers seek to find loan deals for individuals buying property, the methods to get these loans are very different.

Forms

According to Kristin Williams, of Silver Hill Financial LLC, residential deals all require the same forms.
“It’s very standardized,” she said. “1003, 1008, VOD, VOE, etc. But in commercial, each company has their own separate set of documents they require.” In commercial, the deals are all non-standardized and individualized.

Finding value

When it comes to finding comparable in the residential realm, Williams said it is usually easy and quick.

“Traditionally, residential properties are very cookie cutter so you can get several appraisals done very quickly — because there are so many comparable properties out there,” she said. “In commercial, buildings are extremely unique. Appraisal time takes much longer because it’s harder to find similar property types.”

This can lead to more complex, more thorough appraisals — up to 100 pages long — which can take up to four weeks and cost between $1,500 and $4,000.

Calculating loan amounts

According to Williams, residential loans consider extensive loan-to-value (LTV) ratios, sometimes 100 to 115 percent.

However, in commercial, “traditionally, LTVs are very limited just because of the riskiness of the transaction,” she said. “They offer lower LTVs to lower their risk. About 75 percent, sometimes 80 percent is the highest LTV for commercial.”

Also, residential originators consider a borrower’s debt-to-income (DTI) ratio by assessing the individual’s personal income. In a commercial transaction, however, a debt service coverage ratio (DSCR) is assessed, which considers how much a property or business occupying the space must have to cover its debt.

What can be financed?

While every financial institution is different, many consider the following to be eligible property types for funding: Multifamily, mixed-use, office, retail, self-storage, light industrial, bed and breakfast, warehouse, mobile home park, industrial, funeral home, flagged hospitality, rooming house, health care, day care, RV park, unflagged hospitality, restaurant, and gas stations.

In Silver Hill’s case, the following are considered ineligible properties and it would not provide funding: traditional churches, raw land and farms, construction, development, rehab and adult entertainment facilities.

It is best to ask your lender before continuing with the transaction.

How does financing work?

While traditionally, residential brokers can obtain funding with a local lender, LOs need to do a little investigative work to find the best deals for their client. What financing sources are available to commercial brokers?

Banks

“Traditional banks and credit unions are great at offering loans at very competitive rates for your higher-credit-score client,” Williams said. “However, they do have some specific guidelines of the types of properties and the loam amounts. Lots of times, the riskier the property type, the less opportunity you have at a traditional bank.”

Banks also charge a large good faith fee before the loan is even processed, sometimes upwards of $5,000.

SBA loans

SBA loans are multi-faceted if someone wants to pay for the building, business or equipment all in one. It is also good as a standard business loan to provide funding for disaster relief. However, SBA loans take a lot of time — up to 3 months — to finish and requires a lot of documentation.

Private/hard money lenders

Private/hard money lenders are the last-stop shop that is great for high-credit-risk clients, Williams said. They are also bankruptcy or foreclosure friendly.

“They get the loan done quickly,” Williams said. “However, the loan terms are the least favorable with extremely high interest rates — upwards of 15 percent — and the loan balance will come due at a very short period of time.”

There is also a lock-out period that freezes the client from refinancing.

Small-balance commercial lenders

“The credit requirements are a little more acceptable (with a small-balance commercial lender),” Williams said. “They will provide your clients more options and get your loans done quicker.”

Williams did say, however, that all small-balance commercial lenders have their own set of requirements and procedures and it is important to research them and educate the client before going forward.

Buddying up

Finding a good commercial lender may be easier than originators think, as many are reaching out to brokers — teaching them how to make the residential-to-commercial change and establishing referral relationships.

“As small business in America continues to expand, commercial lenders are reaching out to educate and train mortgage brokers on how to originate commercial loans both as a way to build a viable sales channel into the small commercial market, and as a way to leverage the good relationships brokers have already built with their entrepreneurial clients,” Larsen said. “Lenders are making it easier for brokers to make the transition, by simplifying the application requirements, providing classes, distributing marketing materials and program information, and coaching brokers through the commercial loan process from start to finish.”

Benefits of going commercial

“(Commercial) is the ideal arena for accommodating the skills and experiences of residential mortgage brokers,” said Joe Mardesich, president and CEO of Nationwide Commercial Funding, a national mortgage brokerage. “There are numerous advantages for being in the commercial mortgage business.”

Less sensitive to interest rates

The residential loan business is highly sensitive to interest rates, Mardesich said. The higher the rates, the lower will be the number of homeowners who refinance, take out equity loans or consolidate debt. And though the purchase loan business is still available, it may eventually slow if rates rise to a point where fewer people will be able to qualify as home purchasers.

In the commercial mortgage sector, however, rising rates do not have the considerable negative impact that exists in the residential mortgage sector.

“First, most commercial mortgages have balloon payments,” Mardesich said. “Most commercial borrowers have no choice but to refinance or to sell, regardless of where rates may be, every 5 to 10 years. Both selling and refinancing result in new loans, which of course. mean income for the commercial broker.

“Second, commercial real estate owners and investors make their money by buying, selling, exchanging, developing and refinancing. They don’t stop doing deals as rates move up or down. They find ways to have increased interest costs covered by their tenants or other end-users of their properties. Homeowners, by contrast, want to buy a place in which to live and must factor interest costs into their budgets. If interest rates put homeownership out of their reach, they will remain renters, tenants of those who utilize commercial mortgages.

“Third, as indicated above, rising rates can actually increase rental demand and revenue for the owners of apartments, mobile home parks, and certain other types of properties. The beneficiary is not only the owner, the developer of apartments, and the developer/owner of mobile home parks, but also the mortgage brokers who help to finance those properties.”

Growing competition in the residential mortgage business

According to Mardesich, more and more real estate agents are competing with mortgage brokers.

“The numbers increase daily,” he said. “With the Internet, people can shop online and have 5 or 6 lenders or brokers competing for their business with a mouse click. The loan products you and your competitors sell are all the same, because the secondary market is so consolidated in the residential industry. The residential mortgage business has become a frantic ‘commodity’ business, providing revenue to the lowest bidder.”

In the commercial mortgage business, however, the lowest bidder is not necessarily king. There is much less competition than in residential real estate. And there are many portfolio lenders who do not sell their loans to a consolidated secondary market, i.e. there are a great variety of available programs from one lender or broker to another. As a result, by specializing and developing a niche, you can develop a meaningful competitive edge, Mardesich said.

Less regulation in commercial

The residential industry is chock full of rules and regulations.

However, in the commercial mortgage business, you don’t have to worry about the Real Estate Settlement Procedures Act. There are no Good Faith Estimates. No TILAs. You can pay referral fees to anyone, regardless of the service they may perform. Yield spreads are generally not disclosed. Most states do not require any licensing for commercial mortgage brokers, Mardesich said.

The rewards of commercial

The rewards of the commercial mortgage business can be substantial, impacting income and lifestyle. Yet, comparatively few residential brokers are reaping the rewards that await them in the field of commercial mortgages.

According to Williams, commercial brokers who close with Silver Hill average a commission of $10,400, compared to the $3,000-$8,000 with a residential loan.

“Brokers know that the market is strong and growing,” Larsen said. “They see commercial lending as a great way to serve their existing clients better, provide a more complete array of lending products to new customers, and continue to grow despite the recent woes of the residential lending market. It has never been easier for a good residential loan broker to step up to commercial lending.

Online Commercial Insurance Brokers Offer More Than Simply Business Insurance Price Comparisons

Consider a commercial insurance broker the next time you buy insurance online, until a recent resurgence of interest due to new online commercial products, they have not had a good Internet experience.

Brokers provide service, knowledge, quality products, claims help and advice as well as comparing insurance quotes, qualities that are rare or missing in the alternative self-service world of the online price comparison websites.

When direct personal lines cover became an acceptable method of selling and delivering insurance via the Internet, the soothsayers of business doom were crying the tolling of the death knell for the insurance broker as a profession. Even more so for the business insurance specialist intermediaries.

Commercial insurance was notoriously difficult to provide auto-quoting underwriting systems for and it was believed by the mandarins that commercial policies could not be sold online to an ignorant public.

It was imagined that all insurance business would be dealt with direct either by phone or online and the broker trade would decline.

What these people failed to realise at the time though, was that the broker business model, one based on comparing covers and tailoring policies to suit individual needs, was a time tried and trusted method that would re-emerge online as the peoples favourite method of buying insurance, albeit in a new bigger form of the price comparison site.

Commercial insurance price comparison websites were then predicted to replace the broker, as in effect they are providing the same comparative quotation service as the brokers but on a much larger scale.

Commercial Insurance Brokers realised that they were missing out unless they embraced the comparison site competition. Many of the larger and more Internet savvy brokers decided to take on the comparison sites and offer comparison websites of their own, often with great success.

They took their back office comparison systems and web-enabled them to provide a user-friendly interface. The larger commercial insurance sites now rival the big four price aggregators and many offer a wider range of covers.

With the ability to offer specialist products a broker has an advantage over a price comparison site, however many Specialist schemes from commercial insurance brokers can now be found on price comparison sites. You will often need to look deep and really research the market of quotes offered, to find them though.

Although many smaller brokers have signed up to the large price comparison websites, when you search for their products you are rarely shown these offerings. This is because many brokers have put tight underwriting criteria to the type of business they want from the comparisons site.

Often these restrictions mean that the price aggregator cannot quote their policy because of the restrictive terms imposed.

All online commercial comparison websites suffer from rigid acceptance rules defined by the underwriting company.

The fact that if for example, an office does not reach strict security requirements, then the office package comparison system is algorithmically instructed to decline the business.

Computer says No!

Consequently when the comparison sites quotes compared are returned to a prospective buyer, they are usually displayed in the order of cheapest first, showing those without any endorsements or cover restrictions.

Those smaller but maybe more relevant schemes that are maybe slightly more expensive or need some adjustments to the information entered to quote, are not getting a look in against the large insurers who can compete on price.

Many people, especially small businessmen on a tight fixed budget, mistakenly believe that the cheapest insurance is sufficient for their business needs.

This is particularly true of the sole-trader or self-employed tradesman who resents being told he must have public liability insurance to work on a building site for example.

His likely first port of call will be a search engine followed by a big brand price comparison site looking for the best deals.

Most commercial insurance brokers do not want this type of cheap liability business anyway, which is more trouble than it is worth if there is a claim.

They do want good bona-fide small business and registered companies for which they have the advantage over the price aggregators of offering not just specialist packed policies for shops,office, restaurants, pubs and commercial property but also a human face.

Today, more and more trade specific packaged policies are appearing on commercial insurance websites each month as bringing the product to market becomes easier.

Online brokers can offer telephone help, callback services, claims services, market knowledge and advice over price, human versus computer or simply just service. All things that are missing from the price comparison sites.

The new online commercial broker is taking back the initiative and levelling the playing field for the distribution of Insurance on the Internet.

On the whole the future looks rosy for the forward-looking broker who is willing to adapt and change from his Main Street outdated business practices and embrace the Web for all its potentiality.

On a cautionary note, many a local broker with traditional product offerings who does not adapt, will not be found by the general public and his market reach will always be local.

The Internet has allowed online commercial insurance brokers to introduce specialist risks and cover to the business market that would probably not previously been aware of the policies.

It has also spawned new risks itself such as cyber risks cover, professional indemnity and liability for consultants in every IT and online profession, and even commercial property insurance for web server farms.

The local broker is now international if he has the placement facilities.

Niche brokers with niche schemes are now providing these services to new global markets.

Choosing the Right Commercial Broker

Simply explained, a commercial broker is a special type of real estate broker that works especially with selling and listing various types of commercial properties, including industrial properties, businesses, office buildings, and even apartments. If you are going to be involved in commercial investing it is imperative that you find a good commercial broker. A great broker is very important if you want to be able to find some great properties. Having a good working relationship with a commercial broker can give you some access to hot listing that most people will never even see, such as future listings, current listings, and even pocket listings.

So, now that you realize how important a commercial broker is, you probably also know that you need to make sure that you pick the right commercial broker for your needs. Picking the right broker can help you succeed in commercial real estate; however, the wrong broker may lead you into a disaster. The following are some great tips that will help you pick out the best commercial broker for your needs.

Tip #1 – Check Their Specialties – When trying to pick out the right commercial broker, you will want to check and see what their specialties are. You will probably want to pick a broker that has specialties in your area of investing. Some brokers specialize in leasing, buildings, land development, and land. Once you find out their specialty you can decide whether they will be a good fit for what you are looking for.

Tip #2 – Find Out How Experienced They Are – Another thing to keep in mind is the amount of experience that the broker has. You want a broker that has experience in the commercial real estate market and that knows what they are doing. Going with a broker without much experience may not be the best choice.

Tip #3 – What are Their Transaction Volumes – You may also want to find out a bit of their transaction volumes as well when considering a broker. Find out the volume in the number of sales they make and the number of dollars as well. This will clue you in to whether or not they are really doing a great job at what they do.

Tip #4 – Do They Have Any Affiliations or Accreditations? – Also find out whether a broker you are considering has any affiliations or accreditations, such as with the CCIM. This will let you know a bit about their professional life and how reliable they may actually be.

Tip #5 – Do They Have Connections? – Often in the field of commercial real estate, having the right connections can be very important. You want to look for a commercial real estate broker that has connections with city planners in the area and that is also connected to the political processes in the area too. Also find out if they have good mortgage broker and banking connections as well, since these will be important to you down the road.

Tip #6 – Follow Up is Essential – A good broker should always follow up. They should always return phone calls, and they should also keep the promises that they make too. If the broker is not good at following up, then you should consider someone else.

Tip #7 – How Do They Communicate? – The communication style of the broker is going to be very important as well. Find out how the broker communicates when you are trying to pick a good broker. You need to be able to communicate well with your broker and made sure that you are both on the same page, so communication is going to be very vital.

How to Find a Good Broker

Now that you know some good tips for picking out a good broker, you may also need to know how and where you can find one. One way you may be able to find a good commercial real estate broker is by asking for a reference from a title company. Often they work extensively with commercial brokers, so they can provide you with a great recommendation. Commercial appraisers may also be able to steer you in the right direction with a reference of someone good they have worked with in the past too.

You can also check with your local Chambers of Commerce or with the Local Economic Development Departments as well for a commercial broker recommendation. Often you can go online and look at commercial properties for sale and find out what broker is listing them to find a good broker. Also, check around with other investors that you know in your area. Chances are they can send you to an excellent commercial real estate broker.

Remember, finding a good commercial broker is going to be key to your success as an investor. Keeping these tips in mind when looking for a broker can definitely help you to find a good one. Once you find a great commercial real estate broker, you will be able to start looking for great commercial deals that you can invest in and then you can start profiting from your investing as well.