(Article scheduled to appear in Long Island Business News)
Financing commercial real estate isn’t as easy as it used to be!
If you’re thinking about buying commercial real estate the process, never an easy one, is that much more difficult post-real estate crisis.
Assuming that you are able to locate a property and then negotiate a price with the seller that should allow you to achieve what you envision the endgame to be, now comes the most difficult and drawn-out process of the transaction.
That of arranging financing for your proposed purchase.
First you must keep in mind that, unlike residential funding, not every lender lends on every type of commercial property. And some lenders won’t lend on commercial real estate at all!
Additionally even pre-2008, commercial property financing has never been as easy to do as residential due to an underwriting process that is much more involved and somewhat more complicated.
The underwriter will consider the property type, whether it will be owner-occupied or strictly for investment, the debt service coverage ratios based on a variety of factors, the quality of tenants and length of leases if applicable, capitalization rates for the area, zoning issues and more!
Compare this to the residential mortgage market where typically a house will get appraised, financials and credit scores will be scrutinized, and then if it all checks out a loan program will likely exist that the buyer will qualify for.
With commercial mortgages the borrower financials are still a critical piece to the puzzle, but the property itself is more important to the transaction getting done.
While a “bad” borrower is enough to kill any transaction, a property has to fit within the lenders sweet spot as well.
For example, does a lender only like multifamily and mixed-use while they dislike lending on vacant land.
Knowing the likes and dislikes of a lender before submitting an application helps avoid wasting valuable time and money!
Saving money on a commercial real estate purchase and closing!
After what has hopefully only been about a 6-month process including the finding of a property, locating a lender and jumping through hoops and over hurdles set-up by that lender, the end of the process has hopefully been successfully reached.
The definition of success in this case is that a mortgage commitment has been issued and a “clear to close”!
Before you get there, however, in today’s market the savvy real estate buyer is in an excellent position to save what could be a good deal of money on their transaction, including on closing costs.
In the first place the buyer hopefully beat up the seller getting a great price on the property itself. Once price has been agreed to and before the contract is drawn up, other transaction savings can begin to be explored.
While a struggling economy and real estate market can be good for the buyer, the shrinking volume of transactions facing others involved in the process such as attorneys, real estate brokers, appraisers and Title Company’s presents the purchaser with additional potential avenues for savings!
One constant among all of these professionals that a smart consumer can attempt to leverage, particularly now, is that the fees being charged are often negotiable!
When the real estate market is strong and multiple new deals are received each week, an appraiser or some other professional can afford to tell a potential client that the price being charged is non-negotiable.
But not as much now! With the competition for a scarcity of deals fierce, common sense dictates that for the service provider some level of fee, as long as it is reasonable, is much better than earning no fee by not getting selected by the buyer of the property.
Even the title insurance portion of the transaction, where premiums are non-negotiable and set by New York State, represents an area where a savvy buyer can save money.
Despite this, typically most buyers will let their attorney choose the title firm.
One of the reasons that this may occur is that many, if not most, buyers are not aware that by law they are entitled to choose the company providing title insurance. Another reason can also be that their attorney may have an established relationship with a specific firm that they know and are comfortable using.
Despite this fact, buyers need to remember that the non-title insurance premium fees in the transaction can vary widely by firm, and that these can add up to an appreciable amount of money.
For example, while recording a mortgage in some New York State counties costs a title firm $265.00, they might charge the borrower as much as $450.00. If there is a deed and a mortgage to record this would be a fee to the buyer of $900. What if instead the client is charged only $300 for each of these with similar savings on all of the other fees being charged?
That would represent significant savings to be had by using Company A rather than Company B.
In the same way that you would negotiate any fee, the savvy buyer will go to a few title firms firms for an estimate of what their title bill would be.
If it’s possible to save hundreds or maybe even $1,000 this way, why not do it?
The bottom-line is that a real estate buyer needs to closely examine all parts of their transaction, determine what are non-negotiable fixed costs, and then aggressively negotiate the rest!
Hallmark Abstract Service LLC
Michael Haltman, Partner
131 Jericho Turnpike, Suite 205
Jericho, New York 11753
At Hallmark Abstract Service, we work harder to make your closings easier!