Residential Magazine

The Big and Very Scary Question

Have an answer ready if a client or referral partner asks about commercial lending

By Tami Butler

Residential mortgage brokers are busier than ever. With interest rates at an all-time low, more borrowers are making a move. You get a lead, work with the client to get them funded, do a great job, and they tell their friends and family. You have now begun to solidify a new relationship, one that can be an open door to future deals and referral business.

If this is the space where the bulk of your business comes from, it can be a bit intimidating when you get a call from a trusted Realtor or past client asking, “Do you do commercial?” Inside you might quiver a bit, knowing that you’ve never done a commercial real estate deal before. Yet you don’t want to turn down the opportunity.

Whether it’s the relationship you want to save (and nurture) or the big paycheck that allures you, it’s quite tempting, so you utter, “Well … yes!” Shortly after hanging up the phone, you then go into slight panic mode, not knowing what to do next.

You immediately call a colleague, who has no idea how to guide you or make recommendations, because he or she has never done commercial either. Now what? You’ve boxed yourself in with a “yes” and are now expected to perform and deliver. What have you just done? Fear not­ — there is a way.

New world

Residential and commercial mortgage transactions are vastly different from each other. A rookie mistake is thinking that you approach a commercial deal the same way as a residential one. You don’t. What’s important in funding a residential transaction are not the same things that are important in funding a commercial transaction. So, where do you begin?

First of all, call all of your broker colleagues, see who does commercial and find someone to refer the deal to. In this way, at least, you preserve your integrity while giving your prospective client someone to work with and get help from, even if you can’t. This allows you to save face — and honestly, the client or referral partner will be glad to know you’re “connected” by having a network at your disposal for their funding needs. Chances are, your colleague in commercial financing doesn’t do residential, so you can reciprocate on referrals to one another whenever possible.

Another option is to find a local bank or lender that funds in the geographic region where the subject property is located. Many lenders are happy to take your lead and pass it on to a member of their team, who can work with the deal and pay you a referral fee for doing so once it closes. Not all lenders work this way, but some have consumer-direct options or can assign one of their originators to the deal you are unable to do. This is a good option if you have time to seek out a lending source.

Alternatively, you can learn as you go and just give it a try. Ask for advice where you can, get referrals to other professionals, call commercial mortgage lenders and do your own research. This process is a bit slow and tedious, and your chances of being funded may not be the highest, but going solo and learning by doing is an option.

Go through a commercial lending training program to better prepare yourself for the process in front of you. This gives you the greatest potential for funding success as you’ll be armed with knowledge of the process through the wisdom of experienced commercial real estate finance professionals.

It may or may not be possible to get all of your training in as you are working this new lead, so the best course of action is to prepare in advance for when this may happen. If you know you want to do commercial deals on a regular basis, it’s sound business practice to invest in yourself and your business by taking educational courses. Do a little research on-line, and see what programs are out there that meet your schedule and needs.

Commercial complexity

In order to decide which of these options is best for you, it’s helpful to know a few things about the commercial mortgage market to tip your decision one way or the other. Consider these factors.

Commercial real estate deals are generally more complex. No two deals are alike and there are layers of documents required, depending on your choice of lender. You need to know which documents to ask your client for, how to analyze and review them, and what to send to the lender and when. Commercial deals are nonstandardized, in stark contrast to the processes for residential lending, where there are rules you need follow to remain in legal compliance. Not so in commercial. Each state is different, each lender has their own guidelines, and there is no formal system or software.

Compensation for commercial mortgages is not predetermined. Lenders may have their own caps on fees you can charge a client, but for many brokers, this isn’t an issue. Anywhere from one to five points (one point is equal to 1% of the property’s total cost) may be appropriate, depending on the complexity of the deal and the difficulty level in placing it. It’s up to you to determine how much you want to charge. Just be sure to have a signed fee agreement between you and your client.

Residential lending has surely trained you to look closely at the financial profiles of your borrowers, but commercial mortgage lenders look predominantly at the asset in question. While the borrower’s financial details may be a factor in successfully closing a commercial real estate loan, it’s not the Holy Grail. The property is. Lenders want to be assured of the asset’s capacity to maintain a healthy and stabilized cash flow for the duration of the loan term.

Credit is not king in commercial lending. There are many types of lenders out there, with varying credit-score requirements for borrowers. Residential deals rely heavily on credit scores to qualify. Think of it this way: The more ”bankable” a client is, the more important the score is. The more you go toward hard money lending, the less it counts.

Distinctive guidelines

Commercial mortgages generally take longer to close. Forget the purchase contract that requires you to deliver and fund within 30 days (or thereabouts). With commercial transactions, that’s not realistic and is unlikely to happen (unless you’re going the hard money route). Having realistic time-frame expectations from the beginning can help put everyone at ease. Expect 45 to 60 days on average but much longer for construction loans, deals that are subject to property-repair issues, or slow-to-respond clients.

Experience counts with investment properties. Whether or not your client is an experienced investor plays a role in whether a lender will fund the deal, depending on the loan size and the risk profile of the property. First-time homebuyers are viewed positively in residential lending, but commercial lenders (as a general rule) don’t like first-time investors. If they do fund newbie investors, guidelines may be more restrictive, including lower loan-to-value ratios, higher cash-reserve requirements, or being limited to nonowner-occupied investment properties of less than five units to start.

Calculations are different in commercial. Residential loans use a debt-to-income ratio, based on the borrower’s personal income and debts, to determine the maximum loan amount. The commercial world, however, uses a debt-service-coverage ratio, which is a mathematical formula that takes into account the income, expenses and proposed new debt-service (mortgage) payment of the subject property — not the guarantor’s personal income. When the commercial property is operated by the guarantor’s business, a lender may use a global cash-flow calculation, looking at the asset as well as the income and expenses of the business itself.

Establish goals

You can see that a lot goes into a commercial real estate deal, just like the residential side, but it’s different. This doesn’t mean it’s not fun, lucrative or a challenge to be undertaken. Don’t go into it blindly, however, and be as informed as you can.

Find yourself a commercial-finance buddy who can be a great help. Chances are, they’re not going to spend their time working on your deal, but you may pick up some tips that can help you succeed. With each deal you do, you are better equipped to handle the next one. Becoming an expert in commercial lending takes time, but you have to start somewhere.

Set a goal for yourself and decide if commercial lending is something you would like to learn and grow in before adding it to your business model. It’s a whole new world on the commercial side, but maybe change is just what you need. Only you can decide.

It takes commitment and dedication, as well as the capacity to work through challenges and stay calm under pressure. You must have great organizational skills and attention to detail, business savviness to communicate with a more sophisticated borrower, a capacity to think outside the box and a mindset focused on helping your clients to make money. After all, that’s the reason why they purchase investment properties — to make money. It’s not an emotional decision. It’s a business decision. ●


  • Tami Butler

    Tami Butler is an independent commercial mortgage broker at On Point Real Estate Advisors and provides consulting, training, and finance for the commercial real estate industry. She has more than 21 years of experience funding commercial and investment properties. Butler offers consulting and project-based services to those in the real estate profession, mobile loan signings, and training for residential brokers nationwide on how to do commercial deals. Learn more about her and the services of her company at

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