Save precious time by examining these 5 issues up front
When you add small-balance commercial mortgages to your product offering, you create more opportunities to close deals and grow your business. Partnering with an alternative lender expands on these opportunities by giving you the ability to provide solutions for un-bankable small-business owners and investors.
Borrower’s often struggle to work with traditional lenders because their commercial property doesn’t fit the lender’s strict guidelines. This is where you come in. If you understand the 5 factors an alternative lender looks for in small-balance commercial real estate – population/marketability, property type, loan purpose, valuation, and the borrowers themselves – you can quickly spot the deals that can get funded – even if banks say no.
Keep in mind that these five qualities are included with the general mitigating factors lenders consider when reviewing a deal – such as credit score, liquidity, and more.
Lenders generally won’t lend in rural, unpopulated areas with few comparable properties. But a non-bank alternative like Silver Hill Funding can lend in secondary and tertiary markets and will look for qualities that offset obstacles while building the case for an approval.
When you come across a deal involving a secluded piece of commercial real estate, conduct a search of the surrounding areas. If the property is located near enough to a metropolitan area, an alternative lender could use that proximity as evidence of its marketability and approve the deal despite the property’s immediate surroundings.
Then look at the property itself to determine if a lender can judge its value without the help of nearby comparables. For instance, if the real estate has been bought and sold several times in the past few years, a non-bank lender could use the number of transactions as evidence of the property’s marketability – even if it’s located in a secluded area.
2. Property Type
Small-balance commercial lenders each designate a list of eligible properties on which they will lend. While traditional lenders are unlikely to budge when it comes to their requirements, you may be able to partner with a non-bank lender on a property type that falls just outside their box – provided you can prove the deal’s strength in other ways.
First – be up front about the property. Today’s lenders have skilled underwriting teams who can quickly tell if, say, a multifamily property is actually a motel in disguise. You’ll have a better chance of getting your deal funded if you clearly describe the property and give some evidence of its value – even if it’s technically on the lender’s ineligible list.
Then do some research into the lender’s programs to see where their flexibility lies. For example, Silver Hill only transacts on multifamily properties with 5 or more units, but brokers can take advantage of our Plex Program to close deals involving duplexes, triplexes, and 4-plexes – provided the total number of units is 5 or greater. In this scenario, the three duplexes can effectively be referred to as a six-unit commercial multifamily building.
Do your homework to see which lenders transact on your property type, and don’t wast precious time trying to sway those who don’t. At the same time, keep in mind that non-bank lenders can offer additional solutions that expand their program.
3. Loan Purpose
Do you have deals that fall through because of the borrower’s specific need for financing? This is a common reason for turndowns – especially when the loan purpose involves deferred maintenance.
It isn’t unusual for small-balance borrowers to have a need for postponing necessary repairs while they manage their commercial property. What complicates matters is the fact that lenders have differing limits on the “cost to cure” deferred maintenance items. If you aren’t sure whether or not your client is in a position to secure funding from a particular lender, clearly communicate the situation to your representative and learn as much as you can about the lender’s underwriting process. You may be able to determine the deal’s likeliness to close without putting your client through a lengthy appraisal process.
Sometimes a commercial real estate property can be approved or denied based on whether the transaction is a purchase or refinance. A non-traditional lender can look at previous transactions and the property’s marketability to make the deal work.
One of the main reasons small-balance deals are denied is because the lender determines that the borrower has overvalued their property during the submission process. Again, this is a common occurrence – the difference is that a non-traditional lender is more likely to work with you and your client to find evidence of a property’s stated value.
The first step to overcoming valuation hurdles is to understand what a lender looks for as they arrive at a pre-screen value estimation. You can expect that they will conduct an income analysis and review any available sale data, as well as any comparable data the borrower provides. Of course, you should also be cognizant of the factors the lender won’t consider during its internal valuation, such as dated sale data, income generated apart from the property, or comparable data from non-commercial or ineligible property types.
The important thing to remember is that non-bank lenders want to provide a solution for your client and are willing to be creative when evaluating the factors that determine a property’s value. If you believe traditional lenders consistently undervalue your client’s commercial property, take the deal to an alternative lender and provide as much relevant and up-to-date information as possible to your representative. They may still find that the property is overvalued, but they’ll be more willing to identify mitigating factors and approve the deal.
5. The Borrower
At the end of the day, the factor that makes or breaks most small-balance commercial transactions is the strength of the borrower. If your client has a strong credit score, operates a successful business, and is able to provide all necessary documentation, you will be able to take your pick when it comes to lender partners.
On the other hand, a borrower with very poor credit and an unprofitable business can easily prevent a commercial deal from closing – even if the property in question has no issues whatsoever.
Of course, the business owners and investors who require small-balance commercial loans are most likely going to fall somewhere in between the two extremes. Consider the self-employed professional whose tax returns fail to prove the success of her business, or the entrepreneur whose credit report is marred by a bankruptcy he experienced 5 years ago. These borrowers may be credit-worthy, but they’re going to have a difficult time securing financing from their bank.
In these types of situations, an alternative lender like Silver Hill can provide solutions that make the most sense. Our reduced documentation programs are a great fit for borrowers who can’t produce tax returns, and our team has the experience needed to help borrowers who have been ignored by banks and other types of traditional lenders.
Consider these 5 factors when evaluating a seemingly un-bankable small-balance commercial deal to quickly identify its obstacles and selling points. Then use what you know about the flexibility of alternative lenders to determine whether or not you have the ability to provide a solution for the borrower.