A borrower almost left us recently for another lender that was offering a $1,000 credit for closing costs – because … WOW! $1,000!
BUT.. that lender also offered that same borrower a full 1/2% higher interest rate. If we had offered that same rate, we could have given the borrower $11,000.
So – this is just another reminder that lender promotions are often not what they seem to be.
Residential Financing for a Commercial Property?
Residential financing is about 1,000 times better (give or take) than commercial property financing, and here are a few of the reasons why:
- Residential Financing Is Way Cheaper: There are no “no points” loans in the commercial world, and the financing overall is just much more difficult and expensive to obtain.
- Residential Appraisals Are Way Cheaper: Commercial property appraisals cost several times more than residential appraisals.
- Fewer Upfront Fees/Less Risk of Not Closing: Commercial borrowers sometimes have to commit substantial fees up front only to see their deals die at the 11th hour because an underwriter or credit committee got nervous.**
- Faster Close Times: We locked a 12-calendar-day close yesterday. Commercial deals (unless they’re just hard money) can take months to close.
- Smaller Down Payments: Residential financing comes with down payments as low as 3%. Commercial financing usually requires 25% down.
- Lower Interest Rates: Residential financing comes with much lower interest rates.
- 30-Year Fixed-Rates: Commercial property financing comes with very short-term fixed rates or variable rates. There are no 30-year fixed-rate loans in the commercial world.
**Years ago, I was involved in a very complex multi-property deal for a dentist who owned several apartment, office, and retail buildings, as well as a few duplexes and rental homes. He needed a ton of cash for improvements and to take out some very high-rate loans, and I was pulling cash out of his residential properties as part of the overall deal. Anyway, after about 5 months of going back and forth with the commercial bank that had orchestrated the entire deal and after the borrower was out of pocket $35,000 for appraisals and other fees, the bank’s credit committee pulled the plug on the deal at the 11th hour.
Commercial Duplex
An agent asked us last week if we could get her borrowers residential financing for a duplex that is currently under commercial use and in commercial zoning.
The answer is yes, but only if we can prove the following:
- Owner Occupancy: The borrowers will have to live in the property.
- Burn Letter/Zoning OK: We need a “burn letter” from the city that says that the property can be rebuilt as a residential duplex if the property burns down. This is proof enough that the zoning will allow for residential use.
- Kitchens/Bedrooms: The property has no kitchens, so we will need some type of rudimentary kitchens installed (cooktops, sinks, countertops) installed to make the units “residential.” The property already has rooms that can be deemed bedrooms – and no, bedrooms do not need to have closets.
- Highest and Best Use: The appraiser will have to say that residential is the property’s highest and best use. This should not be difficult though, as the property is located in an area where there is a housing shortage.
- No Evidence of Commercial: Signage and other evidence of commercial use will need to be removed in some cases.
