I love the TV show Mythbusters and enjoy watching them at their work. It’s quite inspiring at how much effort they put into dispelling myths. So many things people believe as factual when in reality it is false. False beliefs. It seems that every industry have their myths and the financial industry has their fair shares too.
The fact that less than 2% of mortgage Brokers actually advertise that they even do commercial financing tells me something is either wrong or there’s a huge opportunity for the people that recognize it (beyond the myths).
Fundamentally speaking, financing a commercial property is not much different than financing a home. The approach is just different.
Let me ask you, if financing any property is the same then why aren’t the other 98% of mortgage Brokers doing it?
What I’ve found out is that there seems to be a universal misunderstanding of what commercial financing is and how the process works.
Many brokers I’ve asked usually answered with, ” I don’t know anything about it.” or “I don’t have time for that…”
Some Brokers, even veterans in the business have accepted some of these misleading information as facts when they’re actually myths. It’s like comparing apples versus oranges. All of these misunderstandings and flawed data have prevented them from even investigating in this amazing aspect of financing.
Let’s discuss some of the myths about commercial financing:
- They’re only applicable to commercial properties such as retail, industrial, office buildings and such.
- Rates are much higher than residential and no way to shop around for the best rates.
- Cannot finance certain property (ie. vacant building, contaminated, too old, tear down etc).
- Takes too long or too complicated/too hard (anyone remember riding a bike for the first time?).
- Unknown requirements, hard to overcome what you don’t know (mostly false beliefs):
- Requires big money (down payment)or high net worth
- Too many difficult financing requirements
- Client lacks required experience or knowledge
- Client lacks declared income or citizenship in this country
- Most property are not able to debt service by itself, therefore unable to finance.
- All banks offer pretty much the same loan (for commercial mortgages)
These are some of the reasons that I believe are preventing people from exploring commercial real estate and the lack of interest for mortgage Brokers to be involved in this part of our industry. Most real estate tycoons would rather invest in the news agency building on the left (above) rather than in the residential property next door. Matter of fact, the truly affluent have most of their real estate investments in commercial properties.
So if the above reasons are myths, what are the truths behind those myths?
- Commercial Financing can finance just about everything else that the residential side could not finance; including residential properties that would not qualify on the residential lending guidelines. I have done many that were declined by the residential brokers including the traditional bank’s mobile mortgage team. A fine example are residential properties in recreational markets (ie. Whistler, Harrison Springs).
- Generalizing it would make this false. It really depends. On most commercial properties it is higher by 0.50 to 1.50% or more. However, there is an exception to the rule for residential properties. These types of properties will qualify for residential pricing even if financed via the commercial channel. In Canada we’re also fortunate to have the government helping with affordable housing. If the subject property is a multi-unit rental residence (5+ plex or apartment ), you can qualify for mortgage rates much lower than residential mortgages. Depends on your subject property. It is true for the consumer that they cannot shop around for the best rates because lenders don’t make those numbers available to the public. It would be false, if the consumer retains a commercial broker since we have access to those numbers and know which lenders will also give preferential or discounted rates. On top of it, an expert Financier could potentially negotiate the rates even lower and get better terms.
- Any property can be financed. It all depends on the overall file. Unlike residential financing the rules are not black and white when it comes to commercial lending. I have done financing for contaminated properties, heritage buildings built in 1867, rundown buildings that required extensive renovations and many vacant buildings with clients whose income would not be sufficient to qualify for a purchase of an equivalent residential property.
- Commercial Financing has similar procedures and process similar to financing a home. The “ordeal” is very similar. The paperwork, people involved, time-line and expense could be much more than residential financing. Having an expert with a team of competent players will make the process simple and relatively painless. That’s the key. It’s like learning how to ride a bike for the very first time. It’s only hard if you’re dong it by yourself. Have a coach or team to support you makes all the difference. As far as taking too long? Everything is relevant. Most do take longer but that’s the nature of the business (time consuming for due diligence). However, most single unit retail/office or warehouse financing can be completed in the same amount of time it takes to finance a home.
- I can write another book on this section alone. I would never ask a mechanic about giving a diagnosis for any of my health issues but when it comes to the subject of money, everyone seems to be an expert. Most of the false beliefs I’ve heard in the past most likely came from well meaning friends. A true financing expert can show you how you can even purchase properties with none of your own money. I’ve even helped people with 100% financing myself. Requirements are actually less difficult to achieve than those buying a house! My clients had zero income in two prior years and was able to finance a vacant warehouse with an “A” lender. Good luck in financing a home with that income. Maybe ask your mechanic, Dave for help
- Requires big money (down payment)or high net worth – reality is that most require 20-25% but some can be done as low as 10-15% down payment for certain commercial properties.
- Too many difficult financing requirements – yes, there are a lot more but trust me, they’re mostly common sense requirements and can be easily taken care of unlike residential financing.
- Client lacks required experience or knowledge – bring a management team on or property manager. Problem solved.
- Client lacks declared income or citizenship in this country – 100% false since neither of those are a condition or requirement for commercial loan to be approved.
- It all depends on the overall story and future plan of the subject property. My clients have financed many properties that were unable to service debt on its own. You need to structure the loan proposal to show that it is possible and factual evidence how they’re going to make payments. You may have heard the joke about how to get a loan from a bank. Show then you don’t need the money. It’s true and you can take that to the bank! For commercial financing, any source of income can be used to help make the file stronger. Examples are account receivables that are not on the books in last fiscal year, income from other business that the client owns, other revenue sources from the personal side or even other holding company’s revenue. “There’s more than one way to skin a cat” – this old proverb certainly applies here.
- Just like residential mortgages there are always slight differences that can have a major impact on the mortgage and situation that your client could face. One commercial lender would have registered a 100% collateral mortgage on a 50% loan if it wasn’t for my intervention. How would that affect the client’s future if they needed to use the equity in their property in the future? Good luck is right. They can’t access private or secondary financing any longer. Not all banks require the same covenants or register it the same way. Even the simple requirements for using a holding company or property insurance is different (more on this in underwriting chapter ).
I won’t try to fool you into thinking it’s easy as pie (not sure where this idiom came from but calculating pie is not easy). At the same time, it doesn’t require a genius to figure things out. If you have a map and know how to read one, you can get to where you want to go. Commercial Financing is no different.
Here’s something to consider; no matter what the market looks like, there are always good deals being exchanged between buyers and sellers everyday. Most aren’t even listed for sale anywhere. Interesting isn’t it?
“Whether you think you can, or you think you can’t–you’re right.” ― Henry Ford.
Why is it that you can’t find any good leads? By yourself, you are the weakest link. Get a team or meet the right people to point you in the right direction.
For example, how do you meet the right people to find those really good pocket deals in real estate? You go and meet a lot of people that are in daily contacts with someone who could potentially sell their property without ever listing it. Who? A good start would be realtors or property managers. How about lawyers, appraisers, renovators and other investors?
What you will need in commercial financing is a truly competent team that you could rely on. I will cover that in a later article on building your power team.
It’s not bad being part of the 2 percenters. Sure it’s a lot more uncomfortable to be doing something that 98% of your colleagues don’t want to do. The payback is nothing to laugh at and surrounding yourself with like minded people can only help propel you upward.
I believe in abundance and giving. Please feel free to share any of my articles to your friends and family or anyone that could benefit from what I have written. I love helping people from Surrey, Burnaby to Vancouver as a mortgage broker. I am passionate about helping people have the upper hand when they are financing their home, business, mortgage for their investment property or commercial building. Please leave feedback as I enjoy reading your replies as much as I write these articles. Thank you for taking the time to read my words, I appreciate you. www.SharingBankSecrets.com
Sua Truong helps alleviate stress for his clients throughout the challenging process of financing their property so that they can enjoy their life and focus on their family or their business. His integrity is the cornerstone of what he does and why he has been so successful in such a short period of time as a mortgage broker. In just under 5 years, he has become the #1 Mortgage Broker in his community. He currently mentors other entrepreneurs and mortgage brokers how to stand out and be outstanding. This way anyone can become the #1 Go-To Expert in their community.