Commercial Lenders Are Unpredictable
When you applied for a loan to buy your home, your loan officer knew within minutes whether or not your loan would eventually be approved. Was your down payment large enough? Did your proposed housing expense exceed 25% of your gross monthly income? Was your credit score high enough? If you passed all of the ratios, you knew you were going to get the loan. The decision was all math.
Unfortunately commercial real estate finance is far less predictable than home loan finance. In fact, commercial lenders are notorious for leaving commercial borrowers standing at the alter. The reason why is because most commercial mortgage lenders are portfolio lenders. In other words, if they make a commercial loan, they are likely to keep the loan in their portfolio, as opposed to selling the loan off in the secondary market.
Because they make portfolio loans, a commercial lender's decision to make a commercial loan depends on a whole lot more than the results of a few ratios, such as the loan-to-value ratio, the debt service coverage ratio, and the loan-to-cost ratio.
The decision to make a portfolio commercial loan depends on whether the lender is bullish on the economy. The lender also has to be bullish on the particular property type, such as office buildings or retail centers. For example, the lender might feel that office buildings in your area are over-built. The lender also has to have confidence in the borrower's competence as a sponsor of this kind of commercial building. Finally, the commercial lender also has to like the property and the location.
All of these underwriting decisions are subjective. A borrower can never be sure how a lender will view all of these intangible factors. As a result, many commercial borrowers unexpectedly find that their loans get turned down.
Sometimes an unexpected turndown can be a disaster. Suppose you have a balloon payment coming due on your commercial property, and you apply only to your local bank for a new loan to pay off the balloon. Then, at the last moment, your bank decides that self-storage space in your town is overbuilt. Your old loan balloons, and you don't have the money. Yikes! If the old bank decides to start foreclosure, you will be in serious trouble. Once your existing loan is in foreclosure, very few banks will touch you with a 12-foot pole. (If you get in this position, please send me, George Blackburne, an email I'll use my hard money fund to rescue you.)
What if you are buying a property and the bank let's you down at the last moment? You could easily lose a $50,000 purchase deposit! (If you get in this position, please send me, George Blackburne, an email I'll use my hard money fund to rescue you.)
The wise commercial property borrower will therefore never rely on just one commercial lender. Instead he will apply to a number of commercial lenders at the same time, so that if one lender flakes out he can quickly shift to the next one.
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