Why am I being asked for a deposit?

You are really excited about your commercial loan. You have just placed a contract on a 1MM apartment complex and you need at least $800,000 to make the transaction doable. You have $200,000 in the bank that is hopefully seasoned and sourced so it is just a matter of doing the paperwork, ordering and completing 3^rd party reports and setting up the closing.  You go to your local bank, sit down with your loan officer and realize after about 45 minutes that your local bank does not finance apartment buildings since they only like to do SBA loans.  What do you do? Your earnest money contract expires in 60 days so you have to move fast. You call your local real estate agent who helped you draw up the real estate contract and she recommends a local mortgage broker in the area. You make an appointment, visit and with no certainty the mortgage broker tells you that they have a list of lenders and they are sure they can help.  You fill out a standard residential loan application and provide your broker with a copy of your earnest money contract and you hope the best.  If you are lucky your mortgage broker won’t ask you for a good faith deposit but this is not always the case and you can expect to sign a fee agreement guaranteeing the mortgage broker their fee at closing.  

If your mortgage broker has experience he or she will have at least 5 lenders that they can rely on for commercial financing. Unfortunately this is not always the case. Most mortgage brokers are only versed in residential financing so for the most part your mortgage broker will go online and try to find the best source for financing. Eventually they might find a reputable company and hopefully they will have done their homework but in our experience this is not always the case.

The commercial mortgage business is a very lucrative business with successful mortgage brokers generating anywhere from $100k to $250k in commissions per year but as lucrative as it can be it is also the most unforgiving business to be in. Earlier we mentioned that if your mortgage broker did not do their homework then it becomes a burden on the lender to sift through all the information and determine if your deal is in fact financeable. Most mortgage brokers will send in a copy of the Uniform Residential Loan Application, a copy of your most recent credit report and if the lender is lucky a copy of your purchase contract. With this minimal amount of information your mortgage broker will want the lender to underwrite the file but it does not work this way. Since this is an apartment complex or it can be any commercial property  the lender will want to see at least the most current rent roll for the subject property, two to three years of profit and loss statements, resume on the prospective borrower, pictures of the subject property and any sale comparables.  You might think it is lot information to provide but when you are dealing with millions of dollars this is the norm.  

Why does a lender need these documents (rent roll, profit and loss, resume, pictures, and comps?) We will tell you why.

A rent roll on the subject property will help the lender see the number of occupied units, vacant units, average monthly rent per unit, estimated market rent per unit, average unit square footage, minimum and maximum monthly rent and any utilities and services included with rent. This is important because the lender wants to make that the subject property can support the purchase price but even more important the lender wants to make sure that the property has stabilized rent and the rent is comparable to other rents in the area.  

A profit and loss statement will show how well the property cash flows and provides a historical document to see if the subject’s income is either increasing or decreasing.  This is important because if the subject property has decreasing income that can mean a lot of problems to both the borrower and the lender. The key is to remember that numbers do not lie and lenders always deal in today and not tomorrow.

The resume on the borrower will show past real estate experience and this is key to any real estate transaction. If the borrower has never purchased or owned a commercial real estate property then you can expect either a larger down payment or the lender will require higher reserves to be deposited once the transition has been closed and funded. This is the norm and can be expected. If your client has a track record of commercial real estate transactions then you can expect the red carpet treatment. 

Pictures will demonstrate the quality of the subject property, Lenders like to lend on A and B type properties.  In other words no deferred maintenance or issues that can eventually be a thorn in the lenders side and regardless of what the current owner tells you if a property has a lot of maintenance needed its too risky for anyone to lend on.

Finally comparables will help a lender determine if the subject property supports the asking price. If comparables suggest that properties are selling for a whole lot less than the purchase contract that you provided for your deal is going nowhere regardless of what you or the real estate agent think.  A bad property is a bad property.  You need to remember that lenders deal with today and not tomorrow. Even if the seller tries to convince you that it’s a great property and just needs a new owner who can provide tender loving care this will not convince any lender to do your loan.

Now here’s the fun part of this whole article you can expect to pay anywhere from $2500 to $25,000 with your loan application and the fees are rightfully earned and the fees depend on the size of the loan and the amount of man hours needed.  When you buy groceries you pay, when you pump gas into your car you pay or when you visit your doctor or attorney you pay as well. When you submit your loan application and work is done on your file then you can expect to pay some form of good faith money, deposit for services rendered. On average a Senior Underwriter/Credit Analysis will spend anywhere from five to ten hours reviewing the information submitted. Most of the information then has to be inputted into an underwriting platform for a lending decision to be made. Even if a loan approval is issued unless a deposit has been collected most clients will change their mind or go somewhere else if they receive a better offer. And clients do have the right to go somewhere else but when time, and resources have been expended you can expect to pay. It is just good business. Now if you are fortunate enough to find a lender that does not require any form of deposit then you can rest assured that you will pay a higher origination fee, a higher interest rate or higher processing fees. It is just part of the business and no one like to work for free.