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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2007

Small-Balance: The Jump

Take five steps to add commercial loans of $5 million or less to your repertoire

Small-Balance: The Jump

As residential refinances have tapered off, mortgage brokers across the country have searched for new revenue opportunities. Many are finding that commercial real estate financing is a potential source of income.

If you’re like most residential brokers, however, you may be a bit leery of commercial financing. The process has traditionally been cumbersome and costly for borrowers. But that doesn’t have to be the case.

Small-balance-commercial loans — aka, those for $5 million or less — can be the perfect stepping stone into the commercial lending arena. Depending on your lender, the loan process can be similar to residential lending. In fact, your existing client base can provide several potential financing opportunities. Many of your existing customers may be small-business-owners or investors who already own or who want to purchase commercial real estate.

Plus, competition in small-balance-commercial lending is sparser than in the residential business. Thus, you have the opportunity to step in and take your share of this underserved market. There are five easy steps to get started.

Step 1: Training

First, you must understand the programs available in your market. You often won’t even have to leave your desk to get the information. Most lenders offer live conference-call training or Web-based seminars. You also can attend training offered through conferences that broker trade associations and their state affiliates sponsor.

A good training curriculum will cover the basics of commercial real estate lending, including loan documentation, the appraisal process, typical underwriting guidelines, loan processing, closing requirements and common terminology.

Step 2: Shopping for lenders

Compared to the highly saturated residential lending market, not as many lenders offer small-balance-commercial financing . As such, it’s possible to find lenders that charge 10 times more in closing costs than their competition.

To ensure you don’t lose credibility with your clients, you should research your potential lending partners to get the best value for your borrowers.

Questions for lenders include:

  • What is the rate? Is there a rate-lock option? How much does it cost? Depending on the lender, the processing time for a commercial real estate loan can take one to four months. By ensuring you can lock the rate, you can give your clients peace of mind in a rising rate environment.
  • What upfront fees are required? When could they be refunded? Upfront fees are common and can range from $1,500 to more than $3,500. Some lenders have no upfront fees.
  • What other closing costs will the borrower expect to pay? Lenders vary greatly in this area. Don’t wait until it’s time for your client to sign the closing documents to find the answers to this question.
  • What are the prepayment penalties? Prepayment penalties are standard in commercial lending, but you’ll find vast differences among lenders. For instance, some lenders have a four-year lockout, and some charge 5 percent for the first five years. You’ll also find that some lenders have reasonable prepayment programs and that some will waive the fee if the borrower refinances the loan as opposed to closing it completely.
  • What loan terms are available? Most clients want a fixed-rate product with the longest amortization possible. Others want an amortized loan for 25 or 30 years with a balloon option so they don’t have to worry about a prepayment penalty in five years. You’ll want to work with lenders that can provide a variety of repayment terms.
  • How much work is required of you? Several lenders have a streamlined process that requires minimal effort. If you’re new to the commercial lending space, working with a lender that requires minimal paperwork and a short process is a great way to start.

Once you’ve identified your preferred lending partners, you’re ready to start selling commercial loan programs to potential clients.

Step 3: Mining your database

Most residential loan officers focus solely on their borrowers’ residential financing needs. It never occurs to them to ask their clients if they own the commercial property that houses their small business or when the note is due on apartments they purchased as an investment.

Start by reaching out to existing clients. Whether they are looking to purchase property, to refinance their existing property or to pull out and leverage the equity in their property, you’ll be ready to say yes.

Step 4: Finding customers

The most effective way to build a commercial book of business is to network through professional associations, such as the local chamber of commerce and civic organizations. You also should build referral relationships with other professionals, such as attorneys and accountants.

Placing a small advertisement in the chamber newsletter won’t cost much, and it will create instant visibility with small-business-owners about your specialization in commercial real estate.

As with residential lending, you also can also call upon real estate agents. For example, you can find agents who specialize in multifamily properties by searching the local online multiple listing service.

Direct marketing is another way to build business. List brokers have become savvy at creating specialized mailing lists based on various criteria. Title companies can provide mailing lists of business-owners, second-homeowners and real estate investors. With a mailing list in hand, marketing can be as simple as printing a flier or postcard and sending it to commercial property-owners in your area.

Step 5: Dipping a toe

The small-balance commercial lending process is easier for borrowers and for brokers. Starting can be as simple as taking a training course from the comfort of your desk.

Your marketing efforts can also be relatively low-cost, particularly if you focus on networking and mining potential borrowers already in your contact base.

The commercial real estate market is evolving rapidly. There are now stated-income products for purchase of multifamily and other commercial properties, similar to the stated-income loans offered in the residential market. In some cases, prequalifying your commercial borrower may be easier than doing a prequalification for a first-time residential borrower. The innovation in the small-balance-commercial real estate space is expected to continue at a rapid clip, which will, in the end, be beneficial to small-business-owners and investors.

In the refinance market, a few financial institutions now offer cash-out refinances on investment properties. Additionally, select lenders offer second mortgages, allowing the borrower to pull out cash without touching a low-interest first mortgage.

Given the incredible opportunity in this underserved market, a move into this niche can add to your firm’s bottom line with relatively little (if any) capital investment — all while providing your existing customers with added value and bringing new clients into your business.


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