Fannie Mae Lending Criteria - this one is a slam dunk!

Greetings….

Two blog posts in one week…..just amazing!

Well…not really.

Anyway….

Got a great question from Steve in Colorado regarding lenders and lending criteria.  My friend Terry Painter from the Business Loan Store provided us an answer……

Rob,

I know some investors try to stay away from flat-roof apartment buildings (vs pitched).  In
general I’d prefer pitched but might consider flat especially if new roof or
other big benefit.  However I also heard (not sure if correct) that Fannie
Mae does not fund flat-roofed apartments.  If this is true this could make it a definite
typical “requirement”.  Any comments?

Also,  any comments on what lenders look for regarding unit mix % ratio (this is the % of one bedrooms, two bedrooms, studios, etc) to look out for (with desire for higher mix of two bedrooms vs. one)?

Steve,

Fannie Mae does fund Apartment complexes with flat roofs. But, we (Business Loan Store) are funding
several with flat roofs now.  If any roof has less than 5 years useful life left this will be a problem.   Without question flat roofs do not last anywhere near as long as pitched roofs and are more expensive to maintain.

As for unit mix, preferable unit mix is based on the sub market the property is located.
For example, if there are a lot of students, one bedrooms and studios are often  preferred. Otherwise in most locations, more 2 bedrooms are
preferred.  Usually one bedrooms and studios get the highest rent per SF.
So in locations that have very low vacancy, studios and one bedrooms could bring in the highest
income.

Terry Painter, President
Business Loan Store
104 Monterey Drive
Medford, OR  97504
Mortgage Banker

Office  541-326-0570
Fax     888-404-7089
Cell     541-840-3078

learn anything new?

Until next time…..rob

Jefferson Memorial was purchased on a Wrap.....okay okay...that is not true

Greetings from Washington D.C. (actually…not anymore…but when I wrote this…that’s where  I was…as if you cared).  Still my favorite metropolis (other than Cedar Crest, NM…of course).

Anyway….

With all that is happening with our economy, specifically, lenders not lending.  Creative financing (owner financing) is showing up a lot more.  Great for us…the investors.

In most cases, many of the “owner financing” deals have an existing mortgage in place.  So…for a seller to sell his/her asset with seller financing, the seller may choose to sell via a Wrap Mortgage.  What in the world is a Wrap Mortgage, a.k.a, a Wrap-Around Mortgage?

I have seen many definitions for a “Wrap Mortgage.”  But for us, the investors, a “wrap” is basically taking the existing asset’s mortgage and wrapping it (hence the word “wrap”) with a brand new mortgage.  In other words, a new legal document is created that refers to the existing mortgage (first position) but with the wrap mortgage now making the new owner liable.  The beauty here is, the new owner is only liable to the seller.  The “Seller” is still liable to the original lender.

****Note….A “true” Wrap is NOT an assumption….at least what I am defining here as a Wrap.

There is a lot more to this but the above is the general idea.

Many investors and sellers get a little jumpy when they find out there is a “Due on Sale” clause in the original mortgage when selling an asset creatively.  A “Due On Sale Clause” is simply where the lender can call a loan due if certain points of the mortgage are compromised i.e., a “wrap mortgage.”

Have I ever experienced a lender initiate a “Due On Sale” clause? No.  Have I heard of other investors have to deal with a lender exercising the “Due On Sale” clause?  Yes…but only in a residential investment he or she bought on a wrap.  But….that was the only one.  Even in that instance, the lender worked with the investor on refinancing the asset.  Go figure!

I have yet to experience or hear of it on a commercial deal specifically due to a “wrap mortgage” transaction.  That is not to say that it does not happen.  But my question is, will a lender excercise the Due on Sale clause on a performing note?  I doubt it….but none-the-less it is a possible downside.

Just a few more thoughts regarding a Wrap:

1) the terms of first-position mortgage may or may not be reflected in the Wrap.  Usually, the terms are negotiable with the first-position mortgage being the base line.

2) Legal instruments are used to put the Wrap in place, i.e., REC (Real Estate Contract).  Usually, in a commercial transaction, the documents are a little more sophisticated (uhh…hmm…more complicated since attorneys are involved).

3) In some cases, an escrow company or attorney is used for the ongoing management of the transaction.  In other words, a third party is usually used to make sure payments are collected from the new owner and payments are made to the first-position lender.  This protects both parties.

Of course, there is a lot more detail involved but overall….I love buying assets with owner financing and a Wrap is a great tool.

Until next time…..rob

Hanging with friends and yes...real estate

Greetings from Washington D.C.  Yes….I am still here.

Today I spent time with some friends who used to live in New Mexico and now live in the D.C. area.  I also met up with an old high school friend.  It was great to connect….but the realization of how I let time slip by since I last talked with my friends was fast hitting.

It had been twenty years since I saw my high school friend Israel.  I hope it is not that long when I see him again.

But….I digress….

So….

There is a lot of talk that things are getting better with regards to the economic state of our great country.  Well…I do not agree.  We are getting ready to see another wave of sucker punches…but this time from the commercial real estate sector.  Yes….it is true….commercial real estate is going to hit our economy hard.  The question is…. how hard?  With government money trying to soften the blow, it may not be as hard as I previously thought…BUT…with the government printing money at record levels, there will be a price to pay.  The question is….when is that price going to be paid?  My thought?  …..soon.

High School buddy... Israel

None-the-less….lender’s books are filling up with Commercial REOs.  Commercial assets at discounted prices are showing up by the truck loads….So….it is cherry picking time.  BUT one huge problem.  Lenders are not lending.  Well….at least not without a heavy down payment.  Up to 50% on some deals….especially retail…office….industrial.  Apartments still fair better than other commercial real estate…but even that sector is feeling the pinch.  Have you tried to fund a small apartment complex lately?  Seems like only the 2M and above are getting funded these days and that is in only certain areas of the country.

But….there are a few solutions out there as funding gets tough.  I am seeing more and more seller financing as well as reasonable terms on private money.

So…yes…it is a buyer’s market….but building those relationships outside of lending institutions will give you great buying power in one of the best times to buy commercial real estate.

Until next time……rob

So many lenders! But who is lending? Group picture from CIY in Southern, CA

Greetings from the metropolis of Cedar Crest, NM.  I am back from a fun-filled week in Southern California with my youth group.  Twenty three young adults and four adult leaders (including myself) attended a week-long CIY MOVE (www.ciy.com) event that was mind blowing.  Again, just like when I returned from Bolivia this summer, I am returning home a little more different then when I left. I am seeing things, myself, and everything for that matter….differently.

Anyway…..

Today’s topic is a continuation of financing commercial real estate investments.  We are trying to give you a very basic understanding of the “lending” side of things with regards to buying commercial real estate.

So…….

There are several aspects to obtaining financing for the acquisition of a commercial property. This post will focus on the duties of a servicer and outline this person’s crucial role in the commercial lending process.

What does a loan servicer do?

A commercial loan servicer is an entity that collects, monitors and reports loan payments, handles property taxes, forecloses on defaulted loans, handles late payments and manages insurance escrows. Many commercial lenders also service their own loans. However, some lenders only originate and fund loans and then sell the loans to a servicer to handle the maintenance issues of the loan until the entire debt obligation is fulfilled.

How are loan servicers paid?

Loan servicers make money from small fees attached to payments made on loans. The fees usually are .5% or less of the periodic interest payment. This means that if a mortgage balance is $200,000 and the servicing fee is .5%, the servicer can retain ((.005/12) x 200,000)=$83.33 of the next payment before passing the rest of the payment to the loan note holder.

Loan servicing is traded in the secondary market like mortgage-backed securities. Servicing strips, which are securities created from cash flows resulting from servicing fees, are the commodities traded. These strips are used for valuation of the security when traded on the market.

What can my servicer do for me?

It is important to know who will be servicing your loan when you are in the process of obtaining financing. By understanding your potential servicing partner’s policies, you can develop the right financial planning strategy. For example, if your lender does service the loans they make, they may have more lenient policies for prepayment or delinquencies because they will want to retain you as a client for future deals or refinancing. Lenders who do not service their own loans may not know the full servicing policies of the companies they sell their loans too. If you are obtaining a loan that may need to be refinanced in a few years, it is important to know what options you have.

I hope you are learning from our blog.  Please be sure to register to get our free video series on investing in commercial real estate.

Until next time……rob

So you want a loan? I love to say "NO"

Greetings from the metropolis of Cedar Crest, NM.  Where the heat is getting to me.

So….leaving for California tomorrow and looking forward to it.  I have yet to pack and I have yet to do anything I need to do before I leave….but what is new?

In the news….

Is Microsoft feeling the heat from Apple?  I would say so.  Mircosoft if launching retail stores to compete with Apple stores.  I bought my first every Mac several months ago after experiencing the iPhone.  When I got the iPhone, I could not believe how great it was in almost every facet.  So I dumped my Blackberry and embraced Apple’s iphone.  Then I asked myself, if the iPhone is this good….maybe the Mac is that much better than a PC.  Well…it is.  Imagine a computer that does not freeze up on you?  Imagine no viruses?  Imagine a computer that works all the time?  Yes….after seventeen years of the PC….I went against my own rules….left my pride at the door of an Apple store and bought my Mac.  I don’t see myself ever going back to a PC….well…”never say never”…but I hope not.

So….

We continue our educational journey into financing commercial real estate.  By the way….if you are looking for a great commercial real estate mortgage lender, by all means, give Terry Painter a visit @ www.apartmentloanstore.com.  Terry has pulled rabbits out of his hat for me.  Tell him I sent you and he may do the same for you!

Anyway….on to lending basics….

There are several aspects to obtaining financing for the acquisition of a commercial property. This post will focus on the duties of an originator and outline this person’s crucial role in the commercial lending process.

What does an originator do?

According to investorwords.com, a mortgage originator is a person that oversees the mortgage process by helping the borrower complete the necessary steps to complete the transaction. The successful issuance of a loan is largely due to the skills and experience of the origination and processing teams.

How is commercial mortgage origination different than residential origination?

Information Gathering

For commercial lending, an originator must collect property information, including two years of operating statements, the current rent roll and a brief property description. For residential lending, the originator must collect two years of tax returns, pay stubs and three months of bank statements from the borrower.

Paperwork Completion

For commercial lending, the originator must complete a loan application that has applied appropriate underwritten reserves, calculated the stabilized NCF, supported the derivation of NCF in the executive summary, estimated value and calculated loan to value and debt service coverage ratios and normalized the property’s income and expenses while adjusting for inflation. For residential lending, the originator must complete a 1003 using residential processing software, pulled the borrower’s credit scores, reviewed FICO and calculated debt-to-income ratios.

Additional Steps

For commercial lending, the originator must then submit the loan package to lenders in an acceptable package, receive the final term sheet, obtain signatures and fund the loan. For residential lenders, the originator must determine the lender and appropriate loan, submit the application for preliminary approval, lock or float the loan, order an appraisal, order escrow and title services, submit for final underwriting, order the necessary documents and fund the loan.

The Lender’s Role

For commercial lending, the lender must review the LTV, DSCR and NCF, send a quote to the originator and order the applicable services including an appraisal, environmental, engineering, escrow, title, and UCC. The lender can then fund the loan. For residential lending, the lender reviews the credit histories of the borrower and the prepared 1003, completes final underwriting, prepares and obtains signatures for the necessary documents and funds the loan.

Originators play a crucial role in a finance transaction. When obtaining funding for your next property, make sure to develop a good working relationship with your mortgage originator to make obtaining financing as quick and painless as possible.

Until next time……rob