Shopping for Commercial Mortgage

By: jeff rauth

Business owners that own a commercial property for their business, and have already been through the process of securing a conventional commercial mortgage, understand the complexity and frustration that is a can be a part of the process. There are a few major issues that borrowers should be aware of before selecting a bank/ lender, besides who's quoting the lowest rate.

What is the banks current appetite for your building type, industry and geographical location? This is a difficult question to get straight answers on. If you're dealing with a loan officer, for example (who has a quota and a commission at stake) at a local bank, they may try to "push" your loan through the system despite knowing that your deal has a low probability of closing. You're at risk of losing months and 3rd party fees.

You need to get an unbiased opinions on how hungry the source is and what really fits their criteria. Commercial mortgage brokers, title companies or CPA's that work with real estate related companies can be a source for this information.



An example, is in our state of Michigan. Many local banks are not offering commercial mortgages to businesses involved in the automotive industry, that have industrial buildings and or buildings that are located in metro Detroit, unless their absolute perfect deals. Borrowers run the risk of thinking they have a solid loan, going through the process, ordering expensive 3rd party reports only to get denied deep into the loan. If the borrower has a ballooning loan, they run the risk as well of defaulting on their current loan by not paying it off in time.

A very common mistake we see business owners make, is trying to leave issues undisclosed. The problem with this is that you, the borrower, almost always pays for this. Underwriters will discover the issue and will cancel your loan request.

For example, we recently closed a transaction with a borrower that did not reveal to their previous broker and lender that they had 2, 30 day late payments on their existing commercial mortgage. Not sure exactly what the borrower was thinking but they simply did not mention it. The borrower signed to commitment letter and submitted the $6,500 deposit fee for the appraisal, environmental and processing fee. All the reports were ordered and came in fine.

Underwriting than ordered the VOM (Verification of Mortgage) and it showed the late payments. The deal was immediately canceled and the borrower was not able to use the reports with the next lender... they had to reorder them which was another $5,000.

Our suggestion would be to disclose all issues in the very beginning. Move on until you find a source that you really believe can get around whatever it is, than spend your time and money with them.

Another mistake we see is that business owners assume they will get their best deals from their existing bank (that has their deposits, etc), and consequently do not shop. There is often the idea that if the business owner runs into hard times, they will be better able to work with and reason with their bank. We often hear "you have a better loan program sure, but I'll need my local bank to back me up". We just as often hear prospective clients say "I can't believe my bank called my note. In 15 years that I been with them, I've never once been late. They said they no longer liked my industry and have called my note for no good reason". Just like a mutual fund, it pays to be diversified.

In the same vein, many entrepreneurs also believe that all commercial mortgages are the same. There are many options, that you may not be aware of. For example, there's a little known that has rates and fees right in line with bank financing, but the loan is fixed for 30 years.

Get out there and find the best deal for your situation. Perhaps working with a credible broker makes sense, but regardless, shop and don't assume that your existing bank has your best interest at heart, because, they have their interests at heart.

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