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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2007

Surviving the Residential Drought

Regain some oomph by recognizing the ins and outs of commercial loans

Recent events and changes in the nonprime market have impacted residential originations. These changes are hitting residential mortgage brokers’ businesses hard. As such, many brokers are looking for alternative revenue streams to supplement their income.

A growing number of residential mortgage brokers are supplementing their slowing residential business with commercial transactions. But there are a few things to keep in mind before taking on commercial deals. First, you must consider the state of the commercial market. You also must educate yourself on the are significant differences between residential and commercial financing

The state of commercial

The commercial real estate market is feeling its own tightening, albeit not to the extreme as residential. One affected area is the type of commercial financing available.

In recent years, “hot” commercial loan programs focused on financing in fast-appreciating real estate markets. Qualification was based less on a property’s cash flow and its ability to service the debt and more on its ability to be sold quickly for a large profit.

Now, however, we are seeing a gradual shift back to more-traditional commercial financing that is conducive to income-producing properties. Many commercial lenders have started tightening their belts, looking for properties to generate the cash flow required to support the loan debt.

Hot commercial financing programs now include interest-only and longer amortization programs (in some cases, 40 years) to increase a property’s profitability and to allow it to service a higher loan amount.

In some cases, the residential market’s tightening has aided the commercial market. As some homeowners are being forced back into rental units, for example, the multifamily occupancy rate has increased in some areas. Some multifamily and other rental-housing investors are actually seeing a better return on their investments than in recent years.

Although some local economies have been hit hard, many cities and regions still are experiencing growth, particularly in the commercial real estate sector. It would be worthwhile to research commercial real estate in your area to learn what property types are expected to be hot and how they can affect your marketing.

Knowing the differences

When brokering loans, there are some key differences between the commercial and residential sectors. First, it helps to familiarize yourself with the basic terms and commercial financing concepts. Read about the subject, and consider taking an introductory class.

You will soon learn that all commercial lenders have their own niches, from financing an existing gas station to providing construction funds for a new apartment complex. On top of these niches, each lender will have its own underwriting criteria, forms, loan processes and so forth.

Some brokers shop every loan request they receive. This takes a lot of time and energy, considering many programs and lenders out there. It is more beneficial to first establish what property types you want to focus on by determining which ones are hot in your area. Then find lenders with attractive programs and good closing ratios to handle the scenarios for which you are actively marketing. Do not be afraid to pass on some commercial loan requests.

Although commercial loans tend to take longer to complete than residential loans, they can be more lucrative. You will devote a few more weeks to closing a commercial loan, but you will see the rewards once it is closed. For instance, one-point origination on a $200,000 home loan is $2,000; on a $1 million commercial loan, it is $10,000.

Be patient as you step into the commercial world. It takes more than a loan or two to become an expert, but your confidence and knowledge will grow with each one you close.


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