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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2007

Start Courting Commercial Clients

Potential small-balance commercial borrowers abound — if you know where to look

Small-balance commercial mortgages are a part of the mortgage business that you cannot afford to ignore. Commercial is waiting to be explored and exploited by those willing to try, learn and earn. If you’re ready to start, it can help to know where to start looking for loans and what to expect when you find them.

Where to look

Two sources for small-balance borrowers can be banks’ rejects and your former clients. Here’s a look at both.

1. Bank rejects: The bulk of commercial mortgages are provided by banks, but numerous small-balance mortgage applicants — for loans of less than $5 million — are turned down by banks or are unhappy with banks’ offerings.

The reasons for the bank turndowns are varied. The loan may be too small, the applicants’ credit might be a bit too low, their tax returns could be skinny or perhaps they can’t season and source assets.

On the borrowers’ side, the banks often extend loan terms that applicants deem as too risky. These can include floating rates, balloons, a reduced amortization term, requirements for annual financial reports or a demand for deposits.

In addition to commercial buyers disappointed by banks, existing bank customers also face hard times. Many current commercial borrowers face annual financial reporting requirements or ballooning rates. If their recordkeeping has turned creative or they aren’t prepared for the balloon, they may find themselves in terminal trouble.

Some of these borrowers may turn to private money or seller financing. In other cases, buyers may let these deals die a frustrating death. This is when you can step in to save the deal, if you work with small-balance commercial loans.

2. Former clients: In the past few years, self-employed borrowers turned to Alt-A loans because despite having indicators of excellent credit, the adjusted gross incomes on their tax forms did qualify them for prime loans.

If you review the old 1003 applications from these borrowers, you might find that many of these self-employed clients own their office buildings, warehouses or retail shops. They may also own a number of small multifamily properties. Their 1003s will also show if they have any commercial mortgage debt.

Now is the time to review these old 1003s, however, and look for commercial refinancing opportunities or ways to help these clients with additional funding for future commercial purchases.

What to expect

As many brokers have already concluded or sensed, small-balance commercial mortgages can be a profitable field. If you know who to approach as potential clients for these loans, you also must know what to offer them to get started.

Try working with a small-balance commercial mortgage wholesaler. These inventive funding sources offer a range of desirable mortgage programs. Many enable brokers to compete with banks by allowing them to offer borrowers stated-income, fixed-rate loans. Most important, they can help brokers offset the issues of the residential market.

Many of these small-balance wholesalers understand and respect residential brokers’ hesitation to jump into this world of commercial mortgages. They may extend a helping hand by offering forms, seminars or how-to information, as well as scenario dialogues.

After all, brokers and lenders eat off the same plate — both need loans to close before they go out and celebrate. These lenders recognize that if intelligent help is not offered willingly, they could face a long, cold winter. 


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