So, you have read the Visio SBC blog and you have decided to add SBC loans to your product line, but you want to know upfront how to avoid any pitfalls that may be lurking in the application process. Here are four primary ones to keep on your radar and tips on how to avoid them.
1. Time is your biggest obstacle in SBC lending
The biggest concern in originating an SBC loan is time from the date of application to closing. The primary time suck here is the completion and review of the appraisal. As we have pointed out in previous SBC blog entries, the commercial appraisal process takes typically three to four weeks to complete.
So, the most important step here, is to inform your borrower of the process and set expectations up front to avoid any issues on the back-end. It is also very important that you pre-screen deals, so when you do apply, both the potential lender and you have a handle on the deal.
2. Know the loan story
Before submitting an application for an SBC loan, take some time to understand the backstory on both the borrower and the collateral. This goes beyond knowing if the loan is a refinance or acquisition, you want to understand what the borrower hopes to accomplish with the loan and how they intend to use the property. You need to know if the borrower is just buying a cash flowing asset for income, intends to occupy a portion of the property, or is looking to add value and improve the cash flow. If the latter is the case, then you clearly need to review the borrower’s business plan and understand the value-add proposition.
Regardless of the borrower’s strategy, you need to understand it and be able to communicate the story to the lender. I like to see brokers submit a brief business plan explaining the story (including why they are refinancing or purchasing the property, the plan to make money and who is going to manage the property). All this information goes a long way to improving the chances of the loan going smoothly through the approval process.
3. Loan sizing and estimating the value of a Small Balance Commercial asset
Every SBC customer will tell you exactly what their property is worth. Unfortunately, many borrowers are using overly optimistic cash flows and applying a cap rate from an “A” credit tenant on the best corner in town to determine the market value.
Again, set expectations up front with the customer. Yes, a retail property may have traded at a 4.75% cap a few blocks away from the borrower’s un-anchored three bay strip center, but it was a triple net deal with a publicly traded “A” credit tenant.
There is nothing worse than having a borrower provide an estimate of value and the lender having to go back to the broker and explain the reality of the situation. Doing a little homework upfront can save you and your client both time and aggravation. There are plenty of good free resources on the internet that can provide you information regarding comparable values of property, so you can provide solid information to the lender – again set expectations.
4. Documentation for a Small Balance Commercial loan
Every lender will have its own application and list of documentation that it requires to originate a small balance commercial loan. Review the lenders requirements and take the time to put together a cohesive package. The initial collection of correct supporting documentation at the beginning of the process can greatly reduce the timeline and prevent you from having to go back to the borrower repeatedly, which may potentially impact the timeline.
Generally you will need to collect the following: Loan Application (may also need to provide a separate Personal Financial Statement if it is not part of the application), current Rent Roll, Operating Statements (check with lender if you need prior years along with a current YTD statement), and leases. This information is usually enough to provide the lender with the information to do an initial pre-screening of the proposed loan. Your goal should be to provide a lender with clear and precise information in order for the lender to provide a quick response to your application.
The Small Balance Commercial loan process does take time, but with proper planning most of the underwriting of the loan can be accomplished simultaneously with completion of the appraisal. Remember, much like the old computer saying – garbage in, garbage out (GIGO), the same can be applied to the application process for an SBC loan. So, take time upfront to gather the correct information, do a little research, so you will be cashing that commission check.
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