The Role of a Commercial Mortgage in Purchasing Power Discussions with Vendors

Sellers of commercial real estate pay close attention to the financial stability of potential buyers when evaluating acquisition offers. An offer from a buyer with solid financial backing may be chosen above one from a bidder with less secure finances. If the buyer can’t close, the sale price doesn’t matter. While the buyer is waiting for the loan to be underwritten, the value of any offer will decrease.

The underwriting and closing processes for a conventional loan from a bank or other institutional lender typically take 90 days or longer. Commercial property sellers, including those selling apartments, offices, and retail spaces, are aware of this and do not enjoy it. After deciding to sell and accepting an offer, the seller often begins to hate the prospect of making mortgage, utility, and maintenance payments while worrying that something may go wrong and cause the sale to fall through. Time is of the essence for the seller. You will have more leverage in negotiations if you can find ways to speed up the process.

Since private lenders may finalize loans quickly, borrowers benefit.

Offering a 3-week close as part of price and terms negotiations is a common tactic clever real estate investors use. Real estate experts know their competitors will likely give more extended closing periods than the standard 30 days. It’s been over three months, and the seller still has no guarantees that the sale will go through. Suppose you know the kind of deal a private commercial mortgage lender can close on immediately and have a good relationship with that lender (or a reputable mortgage broker who knows such a lender). In that case, you are in a powerful position.

The Cost Could Be Reduced

Only up to 65% of the purchase price will be financed by private lenders. If you can convince the seller that you can make a more enormous down payment thanks to a lower purchase price and that the deal will be eligible for private (often termed “hard money”) financing that will close in weeks rather than months, they may be willing to negotiate particularly if the seller wants the money to invest in a new construction or project.

Possibly More Favorable Conditions

Sellers willing to carry back a second mortgage on a sizeable portion of the purchase price can inject substantial equity into a transaction and ensure that hard money commercial experts will be interested in it. They might be interested if they knew the second position was temporary and the sale could close fast.

Not an Idea for Home Use

Only experienced investors should attempt complex real estate plans. Don’t reassure worried sellers before you extensively research the home, the market, and your lender. You risk losing both your earnest money and your reputation if you underestimate the ability or willingness of your lender to close the deal. Give yourself a way out of the purchase and sales agreement by being well-informed about the property you’re interested in and the amount a lender is willing to lend.

What Is Needed from Private Lenders to Complete a Transaction in 21 Days

Equity. Hard money lenders require a minimum of 50% protection equity in a land deal (50% LTV), 40% in a vacant building (60% LTV), and 35% in a building with adequate cash flow to meet its mortgage payment (65% LTV) to facilitate a quick completion. Don’t expect them to bend backward to accommodate your accelerated timeline and looser standards.

Cash. Any borrower who cannot or will not come in at least 10% in cold, hard cash will be rejected by private lenders. I would suggest bringing more than that if you plan to close in two or three weeks. Lenders will be uninterested even if the seller is willing to carry back a huge 2nd if the borrower has no real stake in the outcome.

Documentation. Check if the seller has and is willing to provide a complete set of building documents. Working with property owners who have kept thorough records and can promptly produce them in digital format is essential for a quick close. When time is of the essence, and you need to close quickly, you cannot afford to wait for the seller to compile or generate the necessary documents. Seller must submit a certified rent roll with copies of rental agreements or leases attached, copies of pertinent bank documents, and digital images of the property’s interior and exterior. A summary of closed transactions on your resume, a personal financial statement with supporting documentation, and a “source and use of funds” statement detailing the availability of a down payment and the intended use of loan proceeds will all be required.

Legally binding. There is now no time to deal with title issues. The closing will be postponed if the title search turns up any problems.

Low impact on the natural world. Lenders cannot take any chances with potentially contaminated premises since their liability is unlimited if anything goes wrong with the environment. Loans for gas stations, dry cleaners, chemical plants, brownfields, or nuclear waste dumps are not likely to be approved quickly. Hard money lenders have too much at risk to ignore even the slightest evidence of environmental damage.

Access. There may not be time for a certified appraisal if a sale needs to be concluded in a matter of days. The lender will likely conduct many in-depth site inspections. Get them into the building whenever they need it. Scheduling these inspections is usually a one-and-done transaction, and they may need to invite engineers, brokers, or other specialists involved in commercial real estate. The deal may fall through if you don’t accommodate the lender’s schedule.

Income. Money talks and makes deals go through quickly. If the property being used as collateral does not generate income, a commercial loan closing can take longer than the standard three weeks. For a private lender to consider lending money, there must be a positive cash flow of at least 1.2 times the monthly mortgage payment. This income should be supported by leasing agreements that can be proven to last for several years.

Extremely Quick Ends Are Rare

Hard money loans, in general, can be closed far more quickly than traditional loans, and many privately funded commercial mortgage loans close in a matter of days. However, short-fuse transactions are high-risk for lenders. Knowing your lender and picking the right deal is essential to leverage the promise of a 21-day closing. The best deals on income-generating properties can be found with helpful and well-organized vendors. Money and availability of the building should be brought to the table in abundance.

The commercial mortgage lending platforms provided by MasterPlan Capital, a dynamic privately held commercial real estate investment banking organization, range from the conventional to the cutting edge. Online loan applications received by 5 pm EST on business days will receive a response the following day.

MasterPlan Capital LLC’s president is Glenn Fydenkevez. He spent over 14 years at one of the world’s best investment banks and 20 years on Wall Street before starting MasterPlan to serve better commercial real estate property owners, investors, and developers.

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