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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2008

Residential Vs. Commercial: What’s Different

Although the basics do apply to commercial lending, you’ll also need to do some unlearning

As any triathlete will tell you, the real pain in a race comes in the transition. Switching from one event to the next, from swimming to cycling to running, pitches muscles against each other. Strength in one event can work against the athlete in the next.

The same is true for mortgage brokers. As the industry undergoes fundamental transition, brokers who have mastered residential lending are finding themselves competing in a completely different discipline: commercial lending. This field not only requires additional skills, but it also requires that some old skills honed in the residential market be discarded.

Application shock

The fundamental difference between residential and commercial lending is standardization. The residential mortgage industry successfully rendered lending into a small number of variables: loan size, credit score, loan to value, rates and fees. With these few pieces of information, the loan process could be launched.

In commercial lending, however, there is little standardization. There is specialization -- lenders who prefer working with certain types of properties or locations -- but the highly automated, process-oriented practices of the residential world do not exist.

This becomes apparent when brokers new to commercial seek to run a scenario past a commercial lender. New brokers may tell the lender they have a refinance cash-out with a mid-score of 680 and ask the lender’s rate. But they probably will be met with silence. In commercial deals, little of that information matters.

Worse, recent converts often overlook basic information. New brokers often can’t answer the lender’s first question: “Where is the property?” In the residential world, this type of detail isn’t as important.

Application differences also extend to documentation. Universal loan applications, the backbone of the residential lending process, contain little useful information for most commercial lenders. In commercial, each lender has its own thick application forms, its own requirements and its own internal processes. These are usually posted on lenders’ Web sites.

Brokers whose strengths are in customer intake find themselves compiling and organizing material that quickly overshadows the most complex full-doc residential loan they’ve ever seen, even before submitting an application.

Brokers also must master elements of the file that simply don’t exist in the residential world, such as rent rolls, debt-service coverage ratios, environmental issues, leases, inch-thick property appraisals and zoning issues -- again, before they pick up a phone.

In commercial applications, brokers compile this data in a base document known as the executive summary. This can be as short as a paragraph or a page or longer.

The executive summary provides information on the property type, location, value, income being generated from the property (if any), loan amount, loan to value, use of funds and background on the borrowers, including the borrowing entity and the individuals involved in it.

The executive summary not only establishes the investment framework being sought, but it also establishes the knowledge and competence of the broker with whom the lender could be working for months.

Brokers whose writing skills are not the strongest can take heart, however. The most-valuable elements of an executive summary don’t contain a single word. Digital photos -- of the front, back, sides and adjoining properties -- often are incredibly important. Always include them.

Screening lenders

When residential brokers are ready to start conversations with lenders, they may begin by asking about rates. Pricing, however, is the ending point in commercial lending.

There are too many variables for the lender to consider, and providing an instant answer over the phone is usually out of the question. A range of rates and fees might be possible, but even these are rough guidelines.

Instead, your screening question should be, “Do you do these types of loans?” This should be followed by your executive summary. Only later will pricing come into the picture.

The value-add for the borrower will be identifying the lending source and moving the application through the review phase quickly. Price is secondary. Because of the short-term nature of many commercial loans, rate and fee considerations often are not as important as simply getting the deal done. Don’t forget that commercial loans are made for business reasons.

Commercial process

Relations are crucial in every business. In the commercial lending process, broker relations, interactions and roles are dramatically different.

Commercial lenders often have few account executives (AEs). Private lenders, even more thinly staffed, rarely have them. The internal resource, the inside advocate who assists the broker in working a loan through the underwriting process in residential originations simply isn’t there all the time. Instead, the broker typically works directly with the underwriter. And in the case of private lending, the broker will be working directly with the end investor.

Underwriters are strict, conscious of details and have long memories. Representations and explanations that might suffice when working with an AE often will not with an underwriter. Pleading a borrower’s case, insisting on speed or lack of necessity of documents, complaining about the process, and trying to pit one lender against another are all effective skills in the residential world that will fall on deaf ears in commercial.

Keep in mind that private-money loans can close in days, or even hours. But it all depends on documents being on hand and all parties available for signatures.

Commercial loans from institutional lenders, on the other hand, can often take months. The slower pace can drive dynamic brokers to distraction.

The reasons behind the time difference include:

  • Increased complexity of commercial loans;
  • More parties involved (including lawyers);
  • More money at stake; and
  • Ongoing surveillance of the funded loan, if it’s sold into the secondary market.

But there are ways for brokers to help in the process. Attention to detail, responsiveness and leadership are all rewarded.

•  •  •

In many ways, commercial lending resembles residential lending 20 years ago. Methodical and relationship-driven, it requires a level of industry knowledge and professionalism that automated, standardized residential loan origination does not.

Development of the necessary strengths takes time, as well as dedication to the business. But to the diligent brokers willing to build the “muscles” required in this discipline, the temporary pain in transition will result in a new level of freedom, satisfaction and prosperity.


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