Investors interested in purchasing or refinancing a small investment property usually had very little in the form of financing options to choose from. Most lending institutions were of the mindset that bigger is better, why spend the time trying to fund ten $200,000 properties when these banks could more efficiently spend their resources financing a $2,000,000 property. Many lending institutions place lower limits on the amounts they will finance, for some $1,000,000 is the low, others $3,000,000, still some place their lower limits at $4-$5 million. This really created a void in the small balance arena and an opportunity for savvy brokers.
We know why a lender would want to tap into this market, but what are the benefits of small balance lenders to a small to medium sized property investor? Traditional commercial lending is for the most part unbendable, because these loans are underwritten to meet certain standards, they are then pooled and sold on the secondary market as Commercial Mortgage Backed Securities. There is little wiggle room in terms of underwritting these loans. For example a typical conduit deal for a 20 unit apartment complex for $1,200,000 would require the following to receive the most competetive financing, in other words the lowest possible interest rate-
LTV-80%
DSCR-1.20X
Vacancy-5%
Management fee-4%
Cap rate-9.75%
Now keep in mind these constraints will vary slightly between markets and even some lenders, but this is average. In addition certain credit score and net worth requirements come into play and there is no secondary financing allowed by sellers so 20% is the minimum a full documented borrower will be required to put down, recourse is usually full to the borrowers if the deal fails to meet certain requirements. Investors will be required to pay a pre-payment penalty, yield maintenance or defeasance. Application fees can be significant, add to that the appraisal, environmental, surveys, title insurance, etc. and your small property investors are priced out of the deal.
The borrowers can turn to portfolio or hard money lenders, but lets face it unless there is an urgent need to close or huge upside potential who wants to pay 15%-20% interest?
Now take this same deal and look at the small balance alternative. First off lets just get this point made....You will have to pay a slightly higher interst rate for these non-bank propgrams, but lets examine why these loans can be a great alternative for the small property investor:
Flexible cash down requirements - Manay lenders will finance up to 90%-95%LTV with subordinate financing allowed, most borrowers can come up with 10% down.
Unlimited cash out on refinancing - Borrowers have the ability to cash out as many times as they want with no seasoning requirements, this allows property owners to make enhancements to their property.
Flexible Pre-payment penalties - These lenders allow for shorter prepayment lock-out terms and amounts, with no yield maintenance or defeasance requirments.
Limited Documentation or Stated Programs - Some borrowers prefer to disclose as little information as necessary or who can't document income fully.
Longer terms and Amortizations - Typical loan terms for commercial property is 10 year terms with 20-25yr amortization. Non bank programs often offer terms ranging from 15 yrs to 30 yrs. with 30 yr. amortizations.
Low to no application fees - most programs require as little as $500 lender fee, no lender points and is refundable if documentation is received within 10 days of pre approval letter.
Minimal credit score- Programs allow minimal credit scores 580+
No minimum DSCR - Because these programs use a residential underwriting style the borrwers ability to pay is taken into account instead of just the property cash flow being the primary means to service debt.
So as you can very well see, small property owners can still receive reasonable financing for deals that don't fit within the traditional lenders underwriting guidlines. The next time you have a client who's needs fall within the range of $100,000 to $1,500,000 look to a non bank alternative, some lenders will even loan up to $3,000,000 and still consider it small balance.
Commercial Mortgage Group provides creative financing solutions for Multifamily and Commercial Real Estate investors in the 50 United States. The company arranges financing for requests ranging from $100,000 up to $500,000,000 for purchase, acquisition and development, refinancing and construction. You can learn more about the comapny by visiting the website of Commercial Mortgage Group