9 Tips for Staying Out of Trouble with Commercial Real Estate Loans
Commercial real estate lending comes with a lot of risks, which is why you need to be ready before you buy. How do you get ready? You learn the process and plan for every step. It gets easier if you break down your tasks into stages. Here are a few tips for each phase of your application, to help you as you prepare, apply for, and close your commercial loans.
The first three tips deal with preparation. First, start your application process early. You want to plan to deliver far enough ahead of your expected need for the money to allow for the lender to take roughly twice as long as they say they will to process your application and reach a decision. Commercial lenders often underestimate their own review times because of an inability to anticipate when application volumes will go up or down and giving them extra time ensures you will know if you have funding before you have to close on a purchase. You also need to make sure your business plan includes your marketing information and financial projections to give an accurate view of your company. Last, consider applying with multiple lenders at once to increase your chances of getting a yes.
When finishing your application and submitting it to the commercial real estate lending firm you’ve selected, it’s important to be ready for requests for more information. Research this process and try to anticipate what follow-up questions you can expect if your lender has any. Usually, these questions are about details in the business plan they need more information about, so understanding your own plan and being ready to add to it is important. Consider discussing the possibility of a deposit relationship with the lending institution, too, because it can help them reach an offer with more favorable terms. Finally, make sure you insist commercial lenders order the appraisal themselves. This is standard for the industry.
No review of commercial real estate lending tips would be complete without closing advice. Don’t go ahead with appraisals or other costly reviews of the property without a term sheet. Be aware, though, that toxic reports are being required more and more often for properties that have a history of environmental contamination, because without them the buyer inherits the cleanup costs for the property. Finally, be ready to move quickly when you do get an approval, because you will want to close on your purchase as quickly as possible once funding is ready.