In my opinion, purchase money commercial loans are much safer for a commercial lender than refinances. The reason this is important to you is because soon wealthy real estate investors will be returning to the commercial-investment market, and you will be working on a ton of purchase money commercial loans. This article, among other things, will help you sell the bank on making you - or your client - the required commercial loan.
Since the start of the Great Recession in 2008, the commercial real estate market has seen a huge decline in the number of commercial loans made for commercial-investment purposes. A commercial-investment property is a business property that is owned for the primary purpose of generating net rental income. Commercial-investment properties are usually purchased by wealthy investors wishing to receive a cash flow from their investment greater than what they can earn in CD's, bonds, or dividend-paying stocks.
It is easier to understand the concept of a commercial-investment property if you contrast it with an owner-user business property, like a bowling alley, a restaurant, or a hotel. Commercial-investment properties, in comparison, are far more passive. The investor earns his return from rental income, rather than from business income. Examples of commercial-investment properties include multifamily, office, retail, industrial, and mobilehome parks.
The U.S. economy is rebounding strongly. American companies cut a lot of waste during the Great Recession. Sophisticated robots in American factories are replacing cheap Chinese workers (who have reached almost full-employment and who are not as cheap any more). On-shoring (as opposed to off-shoring) is the new trend, as American companies realize that domestic manufacturing gives them better quality-control and faster response times.
Fracking and horizontal drilling here in the U.S. are generating many new high-paying American jobs, and these new wells have greatly reduced our reliance on foreign oil. But there is another, even more important, benefit of fracking. These wells are producing vast amounts of dirt-cheap natural gas.
Dirt-cheap natural gas give the U.S. a huge economic advantage in heavy manufacturing. Millions of heavy manufacturing jobs will be migrating from Europe and Asia to the U.S. because of our dirt-cheap energy (Source: Boston Consulting Group). Housing is also recovering.
Bottom line: The U.S. economy is recovering strongly, and commercial real estate will benefit. Commercial real estate investors will soon be snapping up decent commercial buildings almost everywhere, and you will get to finance them.
Married for 25 years, I took a look at my wife one day and said, "Honey, 25 years ago we had a cheap apartment, a cheap car, slept on a sofa bed and watched a 10 inch black and white TV, but I got to sleep every night with a hot 25-year-old blonde.
Now, we have a nice house, nice car, big bed, and plasma screen TV, but I'm sleeping with a 50-year-old woman. It seems to me that you are not holding up your side of things."
My wife is a very reasonable woman. She told me to go out and find a hot 25 year-old-blonde, and she would make sure that I would once again be living in a cheap apartment, driving a cheap car, sleeping on a sofa bed.
No matter how sweet your purchase-money commercial loan, the bank is likely to push back over the idea of making a non-government-insured commercial loan, i.e., the loan is guaranteed by neither the SBA nor the USDA. When the bank does push back, remind them that purchase money commercial loans are much safer than refinances because:
- The fair market value of the collateral has been established in the open market. The commercial lender does not have to rely on just the opinion of a fallible and/or potentially crooked appraiser. The fair market value has been established by the arm's length negotiations between the seller and the buyer.
- The buyer of the commercial property is putting down cold, hard cash. Some commercial lenders call this down payment "skin in the game". I call it "blood money", and it represents the buyer's blood on the porch that the lender will step over when he forecloses.
- No matter how well a commercial lender underwrites, there is always the possibility that the borrower's business has suddenly taken a downward spiral. Borrowers with financial trouble seldom rush out to put a large down payment on a commercial property. Investors who go out and buy commercial-investment property are usually very sound and solvent financially.
One of the problems you will quickly discover trying to make commercial loans on commercial-investment property is that the bank will only want to finance 60% of the purchase price, and the bank will NOT allow a second mortgage. This means that your buyer has to put a whopping 40% down.
Blackburne & Sons has introduced a new preferred equity program where we will add our fresh equity dollars to your buyer's 25% downpayment to create the 40% downpayment required by the bank.
Unlike the bank, our hard money commercial mortgage company, Blackburne & Sons, WILL allow the seller to carry back a second mortgage behind one of our new first mortgages.
We will make a 75-0-25, a 70-10-20, a 70-15-15, or a 65-25-10, where the final number is the size of the buyer's downpayment. "But George, the SBA will make a loan of 90% LTV." Those are owner-user commercial loans, not commercial-investment properties.
I have a full-time employee who calls banks and credit unions all day long, where he invites them to join C-Loans.com. Most of these banks are scarety-cats, and they decline. I have assembled these banks into The Blackburne List, a huge list of 2,000 commercial lenders, organized by state, that I sell for $39.95. If you are loathe to invest $39.95, its easy to get The Blackburne List for free.
"But, George, my borrrower has perfect credit and big tax returns. He will never pay Blackburne & Sons' hard money rates." Then submit your "A" quality commercial loan using C-Loans.com. It takes only four minutes. You can submit your commercial loan to 750 different commercial lenders, six lenders at a time.
"But George, commercial mortgage portals don't really work." Oh, yeah? C-Loans just (6/7/14) closed an $18.5 million construction loan on a mixed-use project in Wisconsin. The broker earned a $92,500 commission. What would you do with a $92,500 commission?