Commercial Property Loan and Due Diligence
There is a difference between due diligence in a commercial property loan versus residential properties. These are things you should be aware of when you’re financing an acquisition of real estate.
In the commercial context, it’s typical that the underwriting is much more stringent. There’s a bigger down payment required to ensure an appropriate loan-to-value ratio. There’s the typical 90 day period to close escrow. That’s because the bank will want to do a thorough property valuation. That means an appraisal, that means getting an inspector out there, running title. That takes time with commercial real estate. This is because it’s bigger and generally more expensive. The bank will also look at the performance of the borrower or guarantor. They will examine the wherewithal to finance the deal and service the debt. On the commercial side, it’s longer and more thorough.
Commercial vs Residential
On the residential side, it’s typical for the financing to go faster, it’s done within 30 days. It allows the borrower to have a lesser down payment in most instances. There are consequences with that, but the possibilities are 0% financing all the way to 20-30% down. In the residential side, it’s a lot more expedient depending on the bank you use. It’s usual that the closings are within 30 days.
The due diligence on the part of the bank entails the bank looking at your personal credit history. It will look at your personal financials to see if you can service the debt. And once they’re satisfied, it’s typical that the loan process finishes fast.
Commercial Property Loan and Bank Advice
Returning to a commercial property loan deal. The bank you work with depends on your relationship with that bank. It also depends on your comfort level with that bank. I’ve seen deals with national lenders. I’ve seen deals with regional lenders. Also, I’ve seen deals with community banks. They have all been professional, and they know what they’re doing. Speaking in general, dealing with a community bank is more expedient. This is because they have a long-term relationship and the ability to go out there and get a deal done.
When you deal with a national bank, they have more resources. But there’s also a machine. It’s a process for a commercial property loan, and underwriting those loans can drag on sometimes. I always give advice to my clients to go with the bank they know. That they should go to a bank that they’ve had the longest relationship with. This is because that bank would understand the client. They would know whether the client has the ability to finance the deal through.