Preferred Residential Mortgage Loans from Steelhead

Steelhead Capital offers their new Preferred Residential program for home mortgage loans.

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Darby Warly: Hello. This is Darby Warly your host for the Capital Synergies talk show for real estate investors and today we have with us Mr. Britt Miller, Vice President of Steelhead Capital. Britt is here to tell us about a new type of home of home mortgage called Preferred Residential. We’re going to speak about working with a mortgage company with a commercial lending background. And we’ll ask Britt for a few insights into today’s residential mortgage market. Good morning Britt.

BRITT: Good Morning.

DARBY: Thanks for joining us. So many of today’s home loans are in the same high dollar amount one slot of that belonging to commercial properties. We’re talking about one, two, three million dollar plus loans in top markets. In so to respond to the complexities of these residential transactions, Steelhead Capital a nationally recognized authority in the arena has recently launched a new platform called Preferred Residential.

Now Mr. Britt Miller our guest he’s the Vice President of Steelhead Capital and the head of this new division. To go with this new platform Britt is also going to tell us about their new website, steelheadresidential.com. And give us some insights into the current residential mortgage market. So just to start off today, what inspired your move from the commercial lending division of Steelhead Capital into the new Preferred Residential program.

BRITT: Prior to joining Steelhead Capital, almost three years ago now, I actually came from the residential world. I was on the wholesale side where I had started my own company with a group of partners. And what brought me back to the residential world although it is very fragmented and there is a lot of different players, I really believe there is a great opportunity to educate both your clients and also to really negotiate on their behalf.

And what I mean by that is and this isn’t a knock on the industry, it’s just a reality. I think over the last 4 of 5 years with the ease of capital that’s out there I really believe a lot of loan officers were looking for the path of least resistance for they’re documentation type, etc. So I saw it as an opportunity to take some of the disciplines I had learned on the commercial sides and really go out and represent my clients in their best interest and what loan would serve them the best.

DARBY: Yeah. You’re being kind, but there are a lot of guys out there looking for the quick dollar right?

BRITT: Exactly.

DARBY: [Laughs.] Sounds like you still have the perfect set – skill set and experience to launch this new program for Steelhead yes?

BRITT: Well another things as well - what really got me into the lending world was on the residential -being somewhat of an active investor myself - I actually thought that - and this is going back a number of years ago. I did think that I kind of knew the lending world and after getting closer and closer to the business and actually sitting on the lender side I actually didn’t know a lot the nuances that were involved in a residential loan. What’s the word I’m looking for? Part of me is I enjoy doing this by all means. I’m very passionate about it but secondly I’m really able to relate to people being an active investor, buying some properties. You know I think I’m able to give some people a perspective that they relate to.

DARBY: Ok. Let’s talk about your commercial lending background. Say I’m a homeowner looking to secure one of those one, two three million dollar plus residential loans, what advantage does your commercial lending background bring to that transaction?

BRITT: You know that’s a great question and I think its probably more relative given today’s climate in the lending market as opposed to even six months, a year ago. I think over the last year there has been a lot of tightening in terms of credit in the secondary market, and as a result lenders are doing a lot more due diligence on the borrowers than they were a year ago. And what I noted earlier by having that discipline on the commercial side, and what I mean by the discipline, it’s really fact-finding, gathering all the materials.

DARBY: The qualifications are a little more stringent.

BRITT: Exactly. Yeah and then being able to articulate what you have to your different capital sources. That’s really how you do it on the commercial side. On the residential side albeit the disciplines are a lot different and your focusing more on the creditworthiness of the borrower as opposed to the assets on the commercial side.

I’m seeing especially on larger loans the amount of due diligence, and the underwriting, the scrubbing that a lot of these lenders are now doing it requires loan officers to be on their toes. And with that I mean you have to make sure that you’re gathering all the proper paperwork, you know the file inside and out. The last thing you want is a surprise, i.e. the guy has a knock on his credit report. Where to be honest with you a lot of lenders, over the last few years didn’t necessarily have to go through a credit report closely. You know if his credit scores were there. So I think again just underlying it’s really the due diligence and the discipline in being able to serve up the package to the appropriate lenders. To make sure that you are finding a lending partner that can deliver.

DARBY: Let’s just talk about - let’s dive into the idea of actually getting a residential loan. I understand there are many ways to structure a residential loan? How do we determine the best possible financing for each person’s needs, each buyer’s needs?

BRITT: I think the first point is everybody’s level of expectation is a little bit different. Everybody wants the best terms. I think it’s very important to understand what is important for somebody and a perfect example is I had a recent closing done in Southern California where my client truly believed and I support this as well, if he was able to purchase a multi million dollar property for couple hundred grand less than what it was truly worth.

We had a situation where there was some moving parts with the seller who had to come to the table with actually some dollars because he was actually selling it for less than what his loan amount was. And in that situation the objective was we needed to close the sale in a short period of time so my number one priority was certainty of execution, I had a very tight timeline. Certainty of execution at the best terms that I could get.

DARBY: So does that usually bring with it a higher interest rate?

BRITT: You know what in this particular situation due to the lender that I went with, because I do a lot of volume with them I was very comfortable. I articulated back to my client I didn’t really think we were giving up a lot. I still covered the market. I probably took that deal to 5 or 6 different lenders and I still think at the end of the day we still came up with a loan that was very aggressive given the market.

DARBY: Right. So that also speaks to the years of experience you have. You’ve got relations you can draw upon I imagine to get the best deals for your clients?

BRITT: Well you know you hit on a really good point and what I find is and I think this is just the nature of all businesses, a lot of times you’ll find people that - and rightfully so that deserves the best deals that are out there. And I think when you net it all out, an effective mortgage broker you have to have confidence that they are going out and representing you in your best interest.

My approach is I’m not going to take a loan to the lender I do the most business with because I know I can get it closed. There are certain times when that approach is necessary but I think at the end of the day, if you know that your going out and covering the market and this is a discipline again that I think is transferable from the commercial lending world to the residential world.

If you’re covering the market your saying to your client that. “Hey I’ve gone out, I’ve talked to some portfolio lenders, I’ve talked to a couple local banks, I’ve talked to some lenders that are going to sell this. This is going to be a Fannie loan, etc. Here are the pros, here are the cons.” What I’ve actually done, this is for a larger transaction down in Palo Alto where home prices are two and a half million upward...
DARBY: Yeah.

BRITT: My client who is very sophisticated, you know - I took a template I use on the commercial lending side which outlined, you know - I think I took it to 8 or 9 different lenders. I showed the pros and cons of each, what the terms were, what the lender costs were, what the margin was going to be after the loan went from its ARM period, or from its fixed period to its adjustable period and I think that by demonstrating this to my client this is what I do behind the scenes, he was very comfortable with me.

DARBY: Yeah, yeah. You know you can’t really turn on the television these days without hearing about all the sub prime lenders and all the chaos that has been caused in the residential market. What do you think about all that talk and how much impact do you see this having on residential loans going forward?

BRITT: You know it’s…I think it’s been inevitable for quite some time and I think it’s a real wake up call pretty much for the entire industry from appraisers to loan officers, to underwriters, to processors, to borrows. And what I mean by that is honestly everybody’s affected right now. Yesterday there was an announcement from a large, large lender, who I would consider in the top five stating that on August 6th cumulative loan devalue for stated borrowers is being capped at 80 percent. We’re talking - that’s a significant change in the industry.

DARBY: And we saw that the stock market felt that yesterday. It’s not just the lending industry, it’s the whole economy!

BRITT: You know it’s an interesting time as well because, and I want to make sure people don’t take this the wrong way, I really believe and I touched on this earlier. You know the market has been this, it’s like there’s a loan for everybody. That has really been the approach.

DARBY: Right.

BRITT: And now it’s getting back to basics. Its getting back to an effective loan officer when they have some down time, when they’re not prospecting, or they’re meeting with the client, or they’re not putting together a loan package, you have to be on the phone with your lenders. You have to understand what is the underwriting criteria. How are they treated stated self-employed borrowers? What are they doing with the full borrower who has five separate entities? You have to really get into the nitty gritty and understand what are these lenders going to be looking for? It’s not as simple now as - the industry got so how should I say this - lax is probably the appropriate word.

DARBY: It was a thing like a free for all, yes.

BRITT: It got to a point where a lot of – you know, and again the lenders have to take responsibility for this as well, if you rewind and I’ll go back to 2004 which was not that long ago when I was on the wholesale side, there was not a significant pricing discrepancy between the - between showing no income and no asset verification versus going stated, stated. I mean literally stating what somebody makes and stating their assets. The lenders, the market had priced it maybe an eighth maybe a quarter difference. And as a result of that the entire industry was trained to go down that road.

DARBY: Right.

BRITT: Why would you do a ton of heavy lifting where the loan might not go through when you’re going to get maybe an eighth to a quarter break? So what’s happening now is like the brakes have been put on. Loan officers are now being required to reevaluate their pipe line. Reevaluate the type of borrowers their working with and at the same time you have to go back and reeducate some of your borrowers. It may be a year before somebody’s in a position before they can refinance.

So I think an effective loan officer in this transitional period has to be very proactive with their clients because, you know, it may take a twelve month period where we need to restructure you assets so you liquidity is sufficient to refinance out of your ARM that’s coming due August of ‘08.

And I think that in itself the last people who are going to figure it out is the borrower unfortunately and it’s the people that are in the business that are seeing this unfold on a daily basis. There’s literally been significant, significant press releases or announcements, for lack of a better word over the last 60 to 90 days that are paramount when comparing it to a year or two years ago. A year ago you could get 100 percent of devalue up to basically a million bucks. Some of the lenders may be a little bit less. You could go stated, stated, with a 620, 640 FICO score up to a 100 percent CLTD. That market is gone.

DARBY: Yes. And what I keep hearing on the news is that they were unscrupulous loan officers that were. I mean this was not in your loan market at all but borrowers were really kind of taking on way more than they can chew and not really understanding what they were signing up for.

BRITT: You know it is. You’re walking a fine line. I mean we’re talking about over the last few years a significant amount of money where if you’re sitting down with somebody and they’re looking at a $700,000 - $800,000 loan, depending on how you price it out, let’s just assume, you know you are talking a point, point and a half. That’s a loan officer that’s staring at possible $8,000-$12,000.

DARBY: Yeah.

BRITT: And I think everybody in the industry would agree if we’re being honest with ourselves, that there were some borrowers that probably should not be getting the loans. Especially if you looking at sub prime loans.

DARBY: So if I were looking to purchase a home right now what kind of advice would you have for me to obtain the best financing possible given current conditions.

BRITT: Find out what you can afford.

DARBY: Right.

BRITT: Find out what is going on in the market especially in the dynamic market that we’re in right now. And I’m a big believer that there always going to be transactions regardless of the market. It is pretty fluid.

But I think just as important you need to align yourself with an agent and that might be a referral of your mortgage broker, it maybe a referral of a family friend. Make sure you are engaged with somebody that knows the market that you’re in. And what I mean by that is at the end of the day an effective loan officer can definitely save you some money by all means but it’s just as importantly you need to make sure that you’re buying the right property at the right price.

I’ve seen some people repay by $50,000- $75,000 because they’re caught up in the moment. And I think that really pales in comparison to maybe a loan officer that’s doing your deal for an extra quarter of a point that may amounts to $2,500 dollars. But you’re going to turn around and pay an extra $75,000 for a property.

DARBY: Yeah. And I think it’s always good to have an objective opinion. When you’re buying a house there’s a lot of emotion involved, you know?

BRITT: Absolutely. And I think you bring up a really, really key point. You know when I go out and work with people and that’s whether it’s a real estate agent or whether it’s an attorney, whether it’s an accountant, a doctor, whatever it may be. I’m really paying somebody for their advice. If somebody’s just going to sit there and tell me sure you can do that. Yes you can do that, that’s not necessarily the type of person I want to align myself with.

And what I mean by that and how it relates to the business I’m in is I really believe there’s a lot of options out there people can work. There’s big banks, there’s Bank of America. Charles Schwab even has a lending program. There’s credit unions, there’s mortgage brokers, etc.

The advantage I think you really have is with the mortgage broker and I’m assuming here if the mortgage broker is engaged, their doing a lot a business, they have strong relations with their lending sources, the advantage you have is with a broker is this is somebody who’s doing it day in or day out. Their opinion should not be biased. Their opinion should be purely objective.

If Washington Mutual is the right loan for that given situation, Washington Mutual is that lender. If Aurora Loan Services due to the fact that it’s a non-owner occupied or going high LTD, they might be the appropriate lending source.

So my point being is as a starting point for somebody that’s maybe getting into the market for the first time or maybe somebody’s going through a transition and i.e. their starting their own business. Maybe they’re getting out of a particular field they’ve been in for 15 years, maybe they just made a large investment and their liquidity has been affected, I believe a starting point is a mortgage broker, they’re going to be able to give you a really good sense on what their options are, what their alternatives are, what it may cost them, what they may have to give up. And from there I would recommend go out and talk to a direct lender. See what they have to say.

DARBY: Ok. If our listeners want some more information about the Preferred Residential program, tell us the website again.

BRITT: It’s www.steellheadresidential.com.

DARBY: And are there some tools out there to help people kind of get started on the path to know what they can qualify for? What’s all available to our listeners on the website?

BRITT: What I would recommend as a starting point right now, I mean, I think it’s a very personal business. Everybody’s situation is a little bit unique. We will have on the website different loan programs that are available. But I firmly believe a 15 to 20 minute conversation can uncover a lot of information. A 15 minute conversation - let me restate that can basically replace 45 minutes to an hour maybe of going out and researching on your own.

DARBY: Great. Well, Britt, this has been a very helpful discussion on residential loans and your new program called Preferred Residential from Steelhead Capital. Thanks for taking the time to speak with us today.

BRITT: Thank you so much.

DARBY: And again congratulations on the launch of the new website www.steelheadresidential.com.

BRITT: I appreciate it. Thank you.

DARBY: This has been Darby Warly. Your host for Capital Synergies. We’ll see you next time.

Commercial Mortgage Lenders Homepage »

Exploring Small Balance Commercial Loans

Steelhead Capital offers full spectrum Investment Advisory Services for commercial mortgages.

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(Transcript of Capital Synergies Podcast)

DARBY WARLY: Hello, welcome to the Capital Synergies talk show for real estate investors. My name is Darby Warly. And today on the line I am very pleased to welcome Mr. Art Silverman who is Vice President of Debut Commercial Direct. Art is going to talk about some unique and exciting trends in the lending process for smaller balance commercial loans. Art welcome to the show.

ART: Thank you Darby.

DARBY: So Steelhead Capital to my understanding works closely with Commercial Direct because they offer fixed and adjustable rate commercial real estate loans with up to 30 year terms for both owner occupied and investment properties is that correct?

ART: Yes it is.

DARBY: Ok. So in our previous shows we’ve spoken with executives from Steelhead Capital regarding the qualification process for traditional commercial loans for amounts above a million dollars. So today we’re going to learn a little bit more about the more flexible and even residential like programs and its advantages offered by Commercial Direct. So Art, can you give us just kind of an overview of your loan programs?

ART: Sure. Gladly. And to start off Commercial Direct is a national lender focusing commercial loans a million dollars and under, with a minimum loan size of a hundred thousand. And we have two distinct programs. We have one which is more of a bankable type which is more for people who can document income if they are willing and able to do that then we can get them a loan that’s competitive with a bank.
And then we have what we call a stated program where borrowers don’t have to provide any documentation. We don’t do any real underwriting on it. The rates are a little higher but they can still get a conventional loan where as generally the have no options at all for something like that.

DARBY: Ok, so what are the - what are some of the highlights of some of your loan programs?

ART: Ok, you touched upon something earlier which is 30 year term and amortization. That’s great because we offer long term fixed rates as well so someone us can get a fixed rate for the life of the loan for the full 30 years where the bank most often will only offer a five year term.

DARBY: Right.

ART: So that’s critical because when you spread the payments out over 30 years, our rates may be slightly higher than a bank rate but our monthly payment should be lower. Our program is a little bit more about payment than it is about rate. You know what’s nice about having a long term, is the borrower is not looking at repeating the loan process every five years which is a lot of people don’t really like to do that.

DARBY: Yeah a lot of people are feeling a lot pain around that right now, but not sure….

ART: Sure, sure. You know it’s a tough environment outside our company. You know that it is tightening so you know that people who are looking for financing right now will have some fewer options than they did just six months or a year ago.

Besides the 30 term and end, we’re all about speed to close most of our loans within 45 days or less. And the reason even that is still a lot better than the traditional commercial loan which could take several months. The reasoning that it even takes up to 45 days is because a commercial appraisal could take anywhere from 2 to 4 weeks to complete.

We talked a little bit about not having a balloon or a short term loan. We don’t require ongoing financial reporting which is great. So once you have a loan with us you pay, you stay. We’re not looking for financial information. I used to be a small business owner myself and to make our creditors happy we have to have certified financial statements every quarter.

A lot of banks will want that, require that as part of the covenant to their loan, and that’s costly, very costly. And if the bank doesn’t like what they’re seeing in terms of the latest financials, most times they have the options to pull the loan, or say, “I don’t like what I’m seeing and you need to pay up now.” So we don’t do anything like that so…

DARBY: What about a balloon payment?

ART: That’s what I say, we don’t have anything like that. A balloon would be at the end of five years ok you owe us the half a million dollars that you borrowed. Then you’re in trouble if the picture is a lot different now than when you initiated the loan 5 years ago. If the business isn’t doing so well or if your credit isn’t so good, it’s going to be challenging.

So it’s definitely advantages to working with us in terms of getting into a long term program. The majority of our loans are going out on a fixed rate. There is comfort in that and we know that, because we hear that from our borrowers. Every month they know what their payments is going to be, and they know its going to be that for as far as they can see into the future.

DARBY: Ok. And they can borrow up to 97 percent of the property value.

ART: Yeah. Which is fantastic, which is an amazing, yes, our company is so revolutionary. There’s just a couple…

DARBY: That’s a new program right?

ART: Brand new. You know, within the last few months and that’s for owner occupied situations where our owner actually is operating a business in the property. And we’re still…

DARBY: What are some examples of that would that be an apartment building or what?

ART: No. Actually that would be ... an apartment building loan would be more an investment property. But, you know there’s a lot of commercial condos, maybe an accountant wants to buy an office condo for their practice or there’s a distributor who buys a warehouse where a florist wants to buy a retail store? So those situations where just people want to buy their own real estate.

So we actually make it…it’s a good story a lot of times business owners will be leasing the property, makes more financial sense for them to own it and have tax advantages to owning the property. So often times we run into that situation where we help them buy the property, and what you just described with our 97 percent financing program they can come with as little as 3 percent down to buy the property. Which is amazing, most banks max out at an 80 percent loan to value, loan to property value. So we’re well above that. Most borrowers need to plunk down at least 20 percent to buy a property, with other lenders.

DARBY: And how has the problem with the sub prime lending in the residential market…impacted that offering or has it at all?

ART: Well it hasn’t affected us and we’ve always taken I don’t want to say a necessarily a conservative approach when you’re lending 97 percent that’s not too conservative. But we’re aggressive but we’re not crazy. And so its business as usual here right now and I’m hearing and reading and I’m staying abreast of all the things that are happening and there is a bit of a crisis going on. And that’s in my mind - you know it’s never a better time to be employed by Commercial Direct or to be working with Commercial Direct as a borrower. So there’s really been no impact and it’s business as usual.

DARBY: And that’s enough because you don’t have these loans that are going to change five years down the road. These people know what they’re getting into….

ART: But actually it’s a little bit technical. One of the reasons that sub prime is imploding right now is because there’s a lot of teaser rates or interest only starting out or negative amortization. In order to get a sub prime borrower to qualify for a loan, they might be at a six or seven percent interest rate for the first year or two and then three years down the line suddenly their rate on their loan is double digits.

So now that’s not working for them and suddenly they have a payment they can’t afford, and with values going down at the same time that’s a double edge – they’re under water. They can potentially owe more on the property than it’s actually worth. We’ve always underwritten our loans based on what the rate is going to be years down the road not just what it is the first year or two so from an underwriting standpoint, that’s why we haven’t had these sorts of problems.

DARBY: Ok. Can you speak to how does that pertain to someone that is perhaps new to commercial funding? For a small business owner whose just getting into the business sounds like that’s really a better or smarter way to go, because they’re not going to be borrowing against a future that they’re not sure of.

ART: Well in all circumstances it would be prudent for a borrower to make sure that they get into a loan that they could afford.
DARBY: If a business is brand new they may not know what - they don’t have a track record yet to look five years down the road.

ART: Sure. Absolutely those people are going to have a more difficult time today to get - getting financing. There’s the most lenders are taking a whole new look at the credit and risk and one of the things we haven’t talked about yet in this conversation is what’s magic about the Commercial Direct program is that we focus on personal borrower strength and that we take a global look at them. Not just what their business is earning or if it’s an apartment building what kind of cash flow the property is generating but also what kind of money they make personally in other investments that they have. It’s a real difference with what we do and what other commercial lenders do is we take a look at the borrower.

DARBY: Ok.

ART: Traditional commercial lenders they’ll base their lending decision on the cash flow coming from the property or the business financials. And what we’ll do, is we’ll look at the borrower personally and see what kind of person strength - for instance a vacant warehouse that somebody wants to buy as an investment. Banks wouldn’t lend on that! No way! There’s no cash coming in. That’s what’s called debt service coverage. There’s not enough cash flow from the property to pay the proposed mortgage payment. But if the borrower has half a million dollars in the bank or more and is very liquid and has income and we take a look at their tax returns and they can personally support the debt, we’re happy to make that loan.

DARBY: Ok.

ART: Or, in what you said. Lets say its an apartment building, if its fully occupied that’s generally one of the best commercial properties most lenders would love to lend on. But a lot of times an apartment building may have occupancy issues. If it does there is not enough cash flow so a bank is going to pass on it where we can take that property and again combine it with the personal income and get a loan out of it.

DARBY: Right. So what is your relationship with Steelhead Capital? How do you your two companies work together?

ART: Well, Steelhead is a web partner of ours. They focus only on commercial mortgages and we fill the space for them which is the small commercial loan under a million dollars. That’s a real niche. The smaller the loan size the less interest there is in it. Right?

DARBY: Right.

ART: You know the higher the loan amount the more people want to lend on it. The more attraction there is the more money there is all the way around. So we’re - I don’t want to say bottom feeders in the industry, but we’re in the niche. We’re in an underserved market where we feel, we know there’s “gold in them there hills” and there’s tons and tons of small commercial deals across the country that just everybody’s passing on.

And as the borrowing community becomes more aware of us we’re a great lender for these loans. So we fill that void for Steelhead Capitol on these hard to place small loans, that no else wants to lend on. A mobile home park in rural South Carolina for $200,000 as an investment property where the borrower lives in California. Nobody’s going to touch that. We’re willing to loan 90 percent on it, things of that nature. So they’re just nuances and funkiness to the industry where we are actually a dominant player in the small loan category. That’s our focus.

DARBY: Ok, now it sounds like you guys are probably pretty attractive to borrowers who are seeking their very first commercial loans. Do you have any advice for those types of borrowers especially in light of the recent changes to interest rates?

ART: Absolutely. Interest rates wise I don’t think the changes have been that dramatic in fact we’re still in a relatively low historical rate environment. In terms of a first borrower on a commercial loan I would suggest that working with a few different lenders, getting a feel for what you would have to provide as far as documentation, as far as their loan programs. Its not cookie cutter like the residential loan market is.

So people who have done a number of residential loans they might think it’s the same thing in commercial. But it’s a very different animal. Commercial Direct is all about borrower education and full disclosure and making them - helping them make an educated decision. In fact we’ve come out recently with a borrower handbook which helps explain - which is a great piece for anybody’s that about to enter this arena. It’s available on our website commercialdirectloans.com.

DARBY: Ok.

ART: So we’re all about educating the borrowers. Making sure they get in the right program. And we offer multiple programs as well to meet their needs. Its doesn’t have to be a 30 year term, we also offer a 15 year term or a 20 year term and we offer adjustable and fixed programs. But also fixed afloat programs where the rate can be fixed for two, three, five, seven or ten years and then turn it adjustable.

So we have a lot of programs that meet the borrower’s needs. My advice to any new borrowers is talk to different lenders. Get a feel for if they have an appetite for you deal, and make sure you know what’s required of you from the lender so you make sure you try to minimize any unpleasant surprises.

DARBY: Alright. Very good. Well Mr. Art Silverman thank you so much for joining us today on Capital Synergies and for and helping us understand some of the key differences when applying for a small balance commercial loan.

So if you have any investment ideas or lending needs you like to discuss you can go to the quick and confidential loan request form found at steelheadcapital.com. Art, again thank you very much for joining us.

ART: My pleasure and thank you so very much for having me.

DARBY: You bet. You’re listening to Capital Synergies. My name is Darby Warly and we will see you next time. Thanks for listening.

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Closing Phase of Commercial Real Estate Lending

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-- Transcript of Capital Synergies Podcast

DARBY: Hello. This is Darby Worley your host for the Capital Synergies Talk Show For Real Estate Investors. Today we have with us one more time, Mr. A. Sean Aguilar, CCIM and Vice President of Steelhead Capital. Sean is here to speak with us about the exciting final phase of the commercial lending process called “Closing.” Welcome back to the show Sean.

SEAN: Thank you for having me.

DARBY: So talk a little bit about closing. What does that phase entail?

SEAN: The term the closing, actually once your loan has been committed, and you’ve paid your commitment fee and the loan’s been approved by the lender we go into what we call the closing of the loan. And that’s basically where all the final documents, the loan documents, the closing documents, all get assembled and all get ready for signatures and execution so that we can close and record the transaction.

DARBY: I remember from buying my house that this is a time when you get together a big pile of papers in front of you, and you have to sign about 40 different pieces papers. Is that similar in the commercial side?

SEAN: Yeah. Exactly, depending on if its multifamily, or industrial, or retail, your going to have your mortgage document, or your deed to trust, your promissory note, but your also going to have some additional items such as assignment the of rents, and the subordination non disturbing agreement document. So there definitely are some more documents that would need to be signed as compared to the residential side.

DARBY: Ok. So lets just to recap all four phases. How long does the whole deal take to put together start to finish. Is there an average timeframe that you can speak to?

SEAN: I think industry average, plus or minus 45 to 60 days, I think is…if everybody is really firing on all cylinders and paying attention to getting everything done, otherwise it could take a little bit longer and it could be done a little sooner.

DARBY: Are there any things that can come up at the very end of the deal that could stop the deal? Are there things people should be looking out for, you know, last minute surprises?

SEAN: Yeah it’s interesting you used the word “last minute surprises.” We kind of have a saying here, “Its not bad news that kills the deals, its surprises.” One thing to always do is once you get under application with a lender is ask for what we like to call “the closing checklist.” Basically its just a list of items of all the things that go into the deal.

Whether its title reports, appraisals, entity documents, reviews, that’s a good little roadmap, and it all ends toward the closing process. That will kind of help you provide any oversight to make sure there are no last minute surprises. They can really vary. That’s why when you get the title report you want to review it and make sure there’s no additional liens on there that the seller may not be aware of. And if there are liens on there, you just want to make sure that the sellers ... making sure that there’s sufficient equity in that property to pay those off so that you can close and take the property in your name and move forward, so the things along those lines.

Some things to keep in mind too, is then you go through these transactions is sometimes the lender that has the underlying loan on the property may require a certain amount of notification in order to have that loan paid off on the commercial side. And you just need to be aware of certain notification periods that may come into play because that could delay a closing. And that would be a surprise, and it could be an unfortunate surprise because it could add additional costs to the transaction on the seller side.

DARBY: How do your buyers find that information out? Is that something that you do?

SEAN: Well, we again, we provide a lot of oversights. When we communicate with the escrow officer on the transaction, we go through the title report, we tell them that, “Hey by the way, we know this need to get this released and this released.” We like to know and ask them, “By the way, have you sent out a demand for the payoff of that underlying loan?” And if they haven’t we ask them to do it, and if they have done it, if there’s any additional cost to it usually by then they’ve already communicated that to the seller. So again, we’re more so about being proactive and just making sure stuff like that is taken care of.

And then on the buyer’s side, something that could slow down the transaction is depending on what type of loan you are getting, and from what type of lender, they may want vesting or title held in what we call the “single asset entity.” There are certain entity documents or paperwork that needs to be filed for that, whether it’s the formation of the new LLC, Limited Liability Company, or a big corporation, or limited partnership. However you plan to take that vesting, it’s really a good idea to get that paperwork started ahead of time, and work with the escrow officer to see when it needs to be delivered in what format. If it’s a newly formed LLC, you need to deal with the Secretary Of State and get your formation documents done, and that’s something that could slow down a closing.

DARBY: Anything with the government definitely can slow down anything you’re trying to do. So for you guys, it sounds like you really do earn your keep on these deals. And I’m wondering how do you all get paid? Can you explain how your fee structure works?

SEAN: Our compensation is really simple. We charge a 1% placement fee for sourcing the lender and placing the debt on behalf of the borrowers, and since we do act more like a private banking group clearly we…our primary responsibility is sourcing that debt, finding that lender, and loan for the client, but we provide a lot of oversight as part of our program here, and so the 1% of the loan amount we think is very fair and reasonable fee at the end of the day.

DARBY: Is that a fee a borrower would pay on top of their purchase price, or is that…do they end up paying anymore for that, or does that just come out of the…?

SEAN: Well its part of the overall closing costs. It’s added to the transaction cost clearly, but it’s not added to the purchase price in the idea where can it be financed, and now it’s treated as part of your closing cost which you would come out of pocket. That’s for a purchase.

If you were look into refinance, and if there was sufficient equity in the property, well then absolutely, we would get paid with the loan proceeds of the refinance. So it really wouldn’t be additional cash out of the borrower’s pocket. It would be paid through the loan proceeds.

DARBY: Well Sean you’ve really provided a great education on the entire commercial lending process. Is there anything that we’ve missed? Anything that you think our listener should hear before we close this thing up?

SEAN: Well, yeah I think just keep in mind that no transaction is the same, and no borrower’s objectives are the same. They may be similar, but not the same. Its an exciting process. I really encourage anybody that’s either on the residential platform, or has investment commercial property right now to stay engaged, and feel free to continue investing in real estate. Long term, it’s a great alternative and we’re here to help. If there’s anything we can do on our side to help somebody reach their goals of owning and managing on the real estate side, by all means, we’re here to provide that for them and be a big supporter and advocate for them.

DARBY: Great and how do they get a hold of you?

SEAN: They can call us on our toll free number, 888-951-6600, or they can reach us through the internet on the webpage at www.steelheadcapital.com.

DARBY: Well Sean thanks so much for sharing your time and your wisdom with our listeners. We really appreciate it.

SEAN: Alright Darby. Well thank you.

DARBY: Alright guys, join us next week on the Capital Synergies Real Estate Talk Show. My name is Darby Worley, and we’ll see you next time.

Underwriting Phase of the Commercial Lending Process

Steelhead Capital offers a private banking style approach to helping you save time and money on your commercial loans.

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-- Transcript of Capital Synergies Podcast

DARBY: Hello this is Darby Worley, your host for the Capital Synergies Talk Show For Real Estate Investors. And today we have back joining us again, Mr. A. Sean Aguilar, CCIM and Vice President of Steelhead Capital. So Sean is here to speak with us today about the third phase of the commercial lending process which is called “underwriting.” Sean welcome back to the show.

SEAN: Thanks for having me back.

DARBY: Alright. So tell us, just give us kind of an overview of what underwriting actually means. What happens then?

SEAN: Well actually underwriting is the culmination of getting third party reports together, the entire report, the appraisal, any kind of inspections, and basically the operating statements. Getting everything altogether and having the banks underwrite it, if you will, so they can get it to the credit committee and get a credit decision.

DARBY: Okay. So this is the part when you find the lender that’s best suited for us? Kind of a matchmaking process?

SEAN: Yeah. Basically by that time we’ve identified the lender and we’ve made application. Now we’re going down the path with them. Application fees have been exchanged, and we’re working towards the goal of completing the transaction.

DARBY: So what are some important things to think about as a client is going through this part of the deal. How do you keep the deal moving forward?

SEAN: Well I think communication is key. A lot of information is flowing back and forth, and you’re dealing with a bunch of different personalities and different groups, i.e. the lender’s side, your own side, the mortgage broker’s side, the investment sales side, and you have title officers involved. There’s a lot of information there, and it just needs all to be well organized and just processed thoughtfully. Great communication is the key, because lenders, you don’t want to give them things in drips and drabble. You want to give them as much information as possible and really not hold anything back.

DARBY: So is that one of the things that slows people down?

SEAN Yes.

DARBY: You do things one piece at a time as opposed to presenting an organized package?

SEAN: Absolutely. Part of it is based off experience. You may think, “Well hey, I have this right now. Let me just give them this rent roll, but you may not have the operating statements, and if your a novice at it you may be thinking, “Well I gave you the rent roll, can’t you start with that. But they really need the rent roll and the operating statements, because that’s all part of the operating numbers of the property. And so you really need to try to give complete information to the lender because otherwise if do it piece meal, human nature being what it is, you’re thinking, “Well can’t you just start with that and get it moving?” It just really doesn’t work that way.

DARBY: Yeah. So they can’t do it one piece at a time, they have to have every bit of the package together to even get started.

SEAN: Yeah. Yeah. So then if you look back at the beginning of the process, when you’re working with a broker that’s putting the deal under contract for you, its always good to ask “What documentation do you guys have available for me to have once I sign up and go under contract with you?” So you when you look at the financials on the property, if they have everything great. But if the don’t, well then you really need to encourage them, “We really need to get that together because my lender’s not going to be able to do much for us until we have all that information to them.”

DARBY: So who keeps track of all these various documents, and ordering the title, that kind of stuff.

SEAN: Well at Steelhead, we tend to provide the oversight, and really engineer the whole process. That’s one of the things we do is, we get involved at all levels, and it’s really our job to shepherd it through. So I would say your mortgage broker, and/or investment sales broker really should be providing the oversight on that to make sure it gets shepherded through. That’s one of the things we do here because we realize based off experience that if you leave it for everyone else to try to do, nobody really steps up and quarterbacks the transaction through, and that’s one of the things we do here in…

DARBY: I know that from buying a basic residential home how many documents are involved. I can’t imagine how much exponentially greater an organizational packet is when you’re talking about a big loan like this.

SEAN: Sure. There’s a lot of moving pieces, and you really need to be able to know what to anticipate, what to see, and what needs to go where.

DARBY: Let’s go back to that matchmaking phase a little bit, like when you’re finding the lenders. How many lenders do you guys approach? Or do you kind of have such a good knowledge of who’s out there, and who’s going to be appropriate that you don’t have to talk to a whole lot of lenders?

SEAN: Well its an interesting comment you bring up, because there’s lots of lenders out there, and mortgage brokers like to be able to represent, “Oh we have access to 30, 40, 50, 60 different lenders for you.” And from a marketing side that sounds really great when you’re trying to prospect and procure for business. But the reality of it is, a good mortgage broker at the end of the day should basically after revealing the deal and sizing it up, should probably be able to find out who the most five or six most logical lenders are for that loan assignment. And that’s really where the value of a good mortgage broker comes in, because he should be able to determine based off his bucket of lenders to choose from, who’s the most logical lenders for that assignment. And again, as nice as it sounds to prospect, “Oh I have 60 different lenders I could put this loan in front of,” the reality is you should really know who the most five logical strongest lenders suited for that deal are.

DARBY: To me that sounds like a time saving device too, like it could be a long process, but if you have already established from the beginning, narrowed the field so to speak, that seems like its going to save your buyers time.

SEAN: Well your right, you’re right. Because you’re under contract, and have deadlines to meet. And so again, the mortgage broker should really know, “Who are the most logical guys to take it to.” Because it’s still a time consuming process just to present it to five lenders. You need to submit it; you need to review it with them. You need to talk through the deal points, see where their comfort level is, and then you’ve got to get them to agree to issue a term sheet so that you can get an application, start underwriting it.

DARBY: So how long does this part of the lending process take? What’s the average or is there one?

SEAN: The underwriting side?

DARBY: Yeah.

SEAN: Once you’re under application, rule of thumb is usually you try to get the loan under it and with the lender anywhere from 30 days to 45. And part of that process is, just because it could take up to three weeks just to get an appraisal. Once that appraisal is in, it gets…the lender submits it, it could probably go to committee after that. They probably need a good week to pull everything together, because even though the appraisal hits the lender’s desk, it still needs to be pre-underwritten by the lender before they go to credit committee.

So the underwriting process could take anywhere from 30 to 45 days. It could be a lot shorter depending on how well organized everybody is, and if the lender will actually schedule time ahead to process that loan on an expeditious matter, or it could be longer. So you really need to dialogue with your lender and all the people involved and see what a realistic timeframe is.

DARBY: Ok. Is there anything else we may have missed?

SEAN: Well on the underwriting side I just think you obviously during that underwriting time; you’re getting a third party reports back, your property condition reports, and your appraisal reports. You may have an environmental report. Make sure you review them, and look at them. And at the same time you have your title report. When you get that title report make sure you get what we call the underlying exceptions with that title report, and review those, and you may want to have an attorney look at those because there maybe some certain exceptions to that title report that may not be good to have on there, and you may need to get it removed, and you may need legal council to help do such.

DARBY: Ok. Well if our listeners want more some more information about working with Steelhead where can they go for information? What’s the website?

SEAN: They can to our website the www.steelheadcapital.com, or they’re more than welcome to call us on our toll free number at 888-951-6600.

DARBY: Very good. Well Sean thanks so much for joining us again on our show, and guys join us next time when we will talk about the fourth and final, and very exciting phase of the lending process called “closing.” This has been Darby Worley, and you’ve been listening to Capital Synergies. We’ll see you next time.