Real estate loans are one of the most frequently obtained forms of commercial lending. Most businesses require a physical location to store or sell things or office space for their workers. Being able to link borrowers to commercial lending options for real estate will allow you to help your clients and own your firm’s bottom line. But doing this effectively requires a strong understanding of the intricacies of different real estate financing vehicles.
Different types of financing
There are several different types of real estate financing, each fulfilling a different need based on what a client is looking for. Understanding their differences is the first step to ensuring you can help your clients find the capital they need.
Acquisition financing provides that funds can be used to purchase an already built building for storage or operations. Almost any type of business is eligible, including manufacturing, wholesale, service, professional service or retail, as long as they are able to inject 10 percent of the total real estate cost. Because of their low-interest rates, acquisition loans are very affordable, particularly for small businesses.
On the other hand, construction loans are used to improve existing structures or build new ones. Usually secured by a mortgage, funds are disbursed as needed, or as parts of construction are completed. Funds can also be used for the purchase of fixed assets like interior or exterior improvements, including owner-occupied buildings, street improvements, utilities, parking lot construction or repair and landscaping. Once construction is completed permanent financing is usually arranged in order to repay the construction loan and move the borrower into a lower interest, longer term note.
Development loans are used to develop land in preparation for construction, usually through excavation work, running electrical lines, storm sewers, and roads. In this situation, the property is typically used as collateral for the loan until it is sold or can financially support permanent financing.
Permanent real estate loans are obtained after completion of construction, usually to repay short-term construction and development loans. These loans typically have the lowest interest rates and the longest terms. Being approved by a large bank for this financing, however, requires strong financials, a significant down payment, and a good credit history.
Hard money loans are often the best option for companies who have been rejected in the past due to low credit score. These loans are secured by physical property in order to ensure repayment and as a result are available to companies with lower credit ratings. Most banks will not provide this type of loan, so finding a lender who will is essential for a broker’s lending portfolio.
Fix and flip lines of credit allow investors to acquire, improve, and resell the property for profit. Typically, these loans will fund up to 100% of the purchase and repair price, as long as the loan amount is 70% or less of the appraised after repair value. These loans are most often available to businesses with 2 or more years of experience in the industry.
Bridge lines or bridge loans are short-term financings, usually paid off over 3 years, while waiting for approval on longer-term loans. They are usually used to pay employee wages, business utility bills and other accounts payable.
Questions you will need to answer
Understanding what each type of financing does isn’t the only part of finding the best loan for your client. You will also need to answer some specific questions about your client’s business, like where they are in the real estate process? Are they building or renovating a structure, or purchasing an already established location?
You’ll also need to know your client’s credit history and available collateral in order to accurately evaluate if they are well suited for a particular type of loan.
Additionally, the type of industry they are in can affect the type of loan that is best suited for them. Are they a construction firm or a B2C facing industry? The type of industry they work in will affect why they are looking for a loan and which lenders will be favorable to their needs, which can affect what type of loan they need to apply for. Understanding these key questions can save a lot of time as the application process proceeds.
What can you do to further help your client?
There are also some things you can do to help your client not only find a loan but use the capital obtained from it.
Have a variety of lenders available. Few lenders will provide all of the types of loans your client might need. Additionally, having connections beyond lending can help you to better serve clients, so be able to connect them with realtors or contractors who can help them use their loans successfully.
Real estate loans are different based on where in the process a client and what their needs are. Developing a deep understanding of the differences in types of lending, and how they best suit a client, is an important part of the process of finding the right funding for each unique client. To learn more about real estate funding and how to best help your clients take a look at our intensive broker training.