What We Need to Know About Preapprovals in Commercial Real Estate
The 2017 Commercial Real Estate Lending Trends Survey by the National Association of Realtors® confirmed that only 30% of all commercial real estate transactions are all-cash. That is why for the vast majority of transactions, the prospective seller and their agent will always defer to the buyer with proven financing in place versus the offer that only has empty promises as proof they will get the money to close the deal.
By following these simple four steps to secure financing, commercial real estate investors can now compete with the most established buyers and win bids for desirable properties.
Approval Of The Person
With any loan, a potential buyer needs to understand all the eligibility requirements of the most competitive potential lenders. While it is possible to do this directly, this process is substantially more cumbersome and complex in the commercial mortgage industry. For example, there is a sizable number of the most competitive lenders that will never communicate directly with prospective borrowers and only do so through their correspondents or conduits. Finding a reputable mortgage broker with national resources specific to the targeted property type is critical. They will quickly create an extensive list of requirements, pricing and terms.
Identify The Buyer
In all loan instances, the ability to qualify for competitive financing is based on the strength and weakness of the applicants. In commercial lending, any individual who will be a manager, general partner or own at least 20% of the borrowing entity, will be reviewed by a prospective lender. Typically such items as net worth, liquidity, personal income and ownership history are reviewed based on the collective and personal credit is based on an average.
The credit decision always focuses on the weakest characteristics of the borrowers. One individual with a bankruptcy, criminal record or history of mortgage default can cause the entire group to be disqualified — or force the group to remove that individual as a potential owner. Since the requirements have already been provided it will be easy to identify if a prospective buyer can proceed alone or identify investors with a lender’s required financial profile. This allows for a buying group of individuals likely to meet the requirements for receiving financing to be quickly created.
Like a residential mortgage, having a verifiable preapproval by an established mortgage broker allows a seller’s agent to gain confidence that a buyer will close. The same mortgage broker who provided the market research will provide the short list of documents necessary from all the partners to receive a preapproval letter. Typically the only requirements are a recent personal credit report, a personal financial statement and two years of personal tax returns. The turnaround for a preapproval once these documents are delivered should not exceed 48 hours. A reputable mortgage broker will require exclusivity for this engagement, but should never charge a nonrefundable fee for providing this service.
The preapproval will not be property specific but will state that the individual or group can qualify to acquire a property for up to a set price and a set loan to value. The buyer’s agent can now comfortably present this document to any seller’s agent to receive the critical information necessary to evaluate the eligibility of a property to secure a loan.
With the confidence that the potential buyers are eligible for financing, the seller’s agent will typically release the property-specific information to secure a lender’s property approval. While the financial strength and experience of the borrowers are very important, the specifics of the property still represent the most important factors in receiving high-leverage, competitive financing. Typically this information is provided in an offering memorandum. If it is an off-market opportunity or working directly with a buyer, the minimum information required by a lender is the property address, property type, copy of a current rent roll, the most recent 12-month property income statement and five to seven images of the interior and exterior of the property.
This information, combined with the broker’s underwriting and the personal financial documents provided previously, should then be packaged by the mortgage broker and presented to at least three different lenders. This will include a request for a specific loan amount, loan term, structure and maximum acceptable costs based on the requirements of the buyers. The loan packaging process typically takes two to three days. An established mortgage broker will generally receive a written preapproval or loan offer within three to four business days of submitting it. Just like the personal preapproval, the loan offer should not require any fee to the lender to receive it. These documents represent an opportunity for the mortgage broker and lender to help a property go under contact and, if successful, they can expect to earn their fee once the sale closes.
Receiving a loan proposal from a lender means that the borrowers, property type, property location, property condition and requested terms have all been extensively reviewed and approved by that lender. Outside of an on-site property inspection for value and condition, typically the only reason a deal will be declined after that point is if the seller or buyer provided false information. That is why once a loan offer is provided, a buyer’s agent will normally present a purchase contract right away. Assuming the price and terms are agreeable, the lender approval convinces the seller and their agent that there should no longer be any concerns about the ability of the buyer to close on the financing or the purchase.
In the current competitive environment for buying commercial real estate, the No. 1 factor for a seller is the assurance of closing by a potential buyer. By taking advantage of readily available resources at no cost to provide personal and property preapprovals, prospective investors can eliminate all other competitive bids that lack proof of execution for sourcing the money to buy the property.
Article Resource: Forbes