Commercial Real Estate Loans | How to Qualify?
Why is it important? How does real estate loans differ from the typical residential loan, and how can you get qualified and get approved for one of those loans? What’s the difference between a residential loan and a commercial loan? Why should I go with a commercial law?
When you get a residential loan, that loan goes into your credit for those who haven’t seen it. They’re going to lend you money based on how much money you made throughout the year. When you’re doing a commercial loan for anything that’s four units and above, you will be qualified based on the income potential. We’re talking about something that has nothing to do with you at this point. To a certain degree, it still does because they need to put a face to the loan if someone is going to be responsible for it, but at this point, how much you make in a year will not be relevant to the loan process because all the care is what the asset has to provide. Does this property have the income potential that’s going to be sufficient to cover the money that we’re borrowing from the applicant in this case for their real estate endeavors? If it all makes sense, if the numbers make sense for them, that’s when the lender will proceed and issue you the money so you can continue expanding your real estate portfolio.
Today we have a guest, and his name is Hector Perez, and he is from Patch of Land. The reason why I worked with Patch of Land is it’s because their funding program is a little different than most traditional lenders. Their product is very niche. I’ll let him give you all of the details so you guys can learn more about the entire process of applying for a commercial loan.
Lucelia: Let’s talk a little bit about Patch of Land and your role. What do you do that makes you different from all the other lenders out there in the market?
Hector: I’m a loan officer with Patch of Land. I’ve been a loan officer with them for several years. What makes us different from other lenders is that we can close a loan in as little as 7 to 10 business days. We don’t require much documentation. We only require a minimum of 600 FICO Score for the fix-and-flip product.
Lucelia: I believe you mentioned at some point before, when we were chatting, y
Hector: Correct. Once we get a complete package, we can close in as little as 7 to 10 business days. Once you’re actually in our system and we do your second transaction with us, we close faster because we have. At that point, all we need is just an updated application with the new address, the latest numbers, and a title and insurance, and that type of stuff.
Lucelia: Now, I noticed that you have a couple of different programs available for investors on your website. Any chance you can walk us briefly through them? I know you have something for long-term rentals, flipping, and stuff like that.
Hector: Correct. We have two types of products. The first product is a 12-month product, which is 12 months interest with only 0 pre-pay. You can get in and out of that product as quickly as you’d like. That is strictly for our fix-and-flip, fix-and-hold type property. We have it allowed on that product. There’s a reason for the short-term on that loan is just basically, you need quick money to see an opportunity out there. You want to purchase the property, get some rehab money. We finance 100% of the rehab on all our terms and all our loans to get in there. Do what you need to do and then get out of the property if you’re selling the property or refinancing it into a longer-term loan conventional method.
The other program we have is the rental loan program, a 24-month product. That product does not allow any rehab. It’s strictly for term key properties where you purchase them. There is no rehab to be done. There is either a renter already currently living at the residence. Otherwise, you’re going to be getting a renter in that property. That product needs a minimum of 660 on the FICO score. It does have a six-month interest guarantee on that product. That gives you the ability to have it for a little longer to stabilize the rental income. You can go to conventional finance and into longer-term loans because traditional financing, as I understand it, requires at least six months and with the renters in there to stabilize. Those are the products.
Patch of Land can provide funding in as little as 7 to 10 business days.
Lucelia: In real estate, relationships are essential, but what’s more important is efficiency. Patch of Land is already doing its part by providing funding in approximately 7 to 10 business days. What can the applicant, in this case, do on their side to expedite that? Do you expect them to handle all the documents in one shot? What is it that an ideal candidate will be like for you to work with?
Hector: On the fix-and-flip, we’ll stick with that since that’s the majority of our business. There’s not much that is needed other than an application. We only lend to an LLC or corporation, so the client will have to have an LLC set up. We don’t need that to start the process, but we need it to cross the finish line. If they want to be diligent, they wish to apply for an LLC ahead of time to have their documents already needed to be sent to us. We need the purchase contract fully executed by both the seller and the buyer to happen once they find a property. If they’re going to use a general contractor, they might want to start talking to general contractors to see their pricing because they will have to shop for that.
To be more efficient to set up their LLC and then find a general contractor that they’re going to feel comfortable that way when they do find a property, they’re always already set up to where that contractor comes out, gives them the bid for what work needs to be done and go from there. Outside of that, a bank statement is something that they can get to us fairly quickly, a driver’s license, and then the insurance information for their agent that is needed, and that’s pretty much it.
Lucelia: This is quite helpful because some viewers in the channel are getting started in real estate. Some of them have done real estate using traditional lending forms, going through the bank, and getting 20% down. Some of them might not be familiar with the whole concept of closing a property on an LLC. You’re sharing with them that they should do that beforehand to get the process expedited helps them a lot. How do you determine if a deal is worth lending money to? Do you do some calculation or evaluation on your end, or is it something that the applicant needs to provide?
Hector: Well, obviously, Lucy, if the numbers make sense, we’ll do the deal. How it works is we deal with new investors all day long. If we have a client with zero investments, they’re just starting off getting into the business. Then we will lend them 80% of the purchase price on day one and finance 100% of the rehab budget. What validates whether we’re going to do the deal or not is just establishing customer’s investment over the last few years. We’re asset-based. I will need the property or at least the zip code at some point to confirm that the property is in a desk location. It’s not ruled out in the middle of anywhere, in the woods, or next to a power plant, train station, or some source where it might not sell as quickly or have renters wanting to rent that property. That’s why we need that.
Those are the two pieces of information that I need, or we need to be able to confirm whether we’re going to proceed with the deal or not. The only two reasons why deals would– Not the only two reasons, but two majority reasons why deals would not close with Patch of Land would be that the values don’t come in, where they say they are, we’re going to have to order an appraisal on every property.
Let’s say that a property we’re going to buy for $100,000, or we’re going to put $20,000 of rehab in it. That’s $120,000 and the after repair value, once everything is completed, is worth $160,000, but the appraisal comes in as the after-repair value of only $130,000. The numbers are too close or too tight to make it make sense. What we never want to do is put a client in a position where the profitability is so small that they might get frustrated and walk away from the deal. We’re not in the business for closing on deals or have you. We want to lend money, get clients in the properties, sell the property, refinance the property, and move on to the next deal again.
Lucelia: That way, it’s a win-win for everybody!
Hector: Correct. We will do our due diligence, or I will do my due diligence to look at the property and the whole situation. That is why I need the application to get a full picture of the client and the property. Then I can decide, “Yes, this is a viable loan. Let’s go forward,” or “No, it’s not. Stay away because of these reasons,” or “We cannot do it because of these reasons.” The client will not lose anything because they’re just giving me information to decide whether we’re going to be able to lend or not. Once we determine that we can lend, we move forward and go through the process.
Lucelia: One thing that I’ve experienced with some of the viewers and even some of the colleagues when they first started on real estate investment is that they were too afraid to fully share the truth, like, “Oh, wow, they’re going to find out that I don’t have any experience and they might not want to lend to me.” I remember telling them, “If you don’t tell them the truth, they’re going to find out regardless once they start checking on the stats and the numbers of the properties.”
In the past, I’ve had colleagues when they recently started and even some people who have reached out to me separately ever since I’ve launched the channel. They asked, “If I tell them that I don’t have any experience, the lender might not want to lend to me and might think that I’m a high-risk type of applicant.” The answer I used to tell them was, “If you don’t tell them the truth, they’re going to find out regardless once they start running the number. That’s a horrible way to start building a relationship because you’re burning it right from the get-go.”
Hector: Exactly. That’s why I always say Lucy, honestly is the best policy. Just telling me upfront what you’re up against so that we know how to work around it. Again, we’re going to lend to new investors, so we don’t need any experience in that piece. If we’re doing a ground-up construction that is building a single residence from the ground up, then we need experience at that point. Suppose you’re telling me you don’t have experience. In that case, I should tell you that I cannot do that deal upfront than for us to go down the path, have you spend the money, start the process, bring documentation, and ultimately find out that the expense is not there and the deal dies at that point.
That is why it’s better before coming, give me all the information to better understand what we’re trying to do and get the loan to go through. The last thing we want to do is waste people’s time or money.
Lucelia: Correct. I’ve read something about pre-funding. I don’t know if that’s something that we should be covering here. What exactly does pre-funding mean?
Hector: Pre-funding lets the client know that all loans are pre-funded. They’re ready to go. That way, when we have to close the deal, for example, if we’re running to the wire and you’re down to the last day. Finally, all the documentation we got in that was needed to close the deal finally came in. We can push a button and send the money through the wire. That’s what pre-funding means. It means we got to get the documentation. We have to wait, still process it. This tends to happen towards the end of the month a lot in our industry.
We have loans where we’re waiting for just one piece of documentation to make sure that we’re clear to send that money through. Then that piece of documentation comes in on the ninth hour. We get it. It’s good to go. Push the buttons and the money through. Pre-funding helps us get the money quickly to the client when they need it.
Lucelia: If they’re planning to do a deal, sooner or rather than later, they should start providing you with the documents, just that way, you have everything. Is it like a pre-qualification of a process kind of thing? Then, in the end, they should only provide you the actual document that matters. What are those? The contract or whatever is it that you require on your end?
Hector: Correct. We’re going to require the necessary information about the fund. We’re not going to be waiting for certain basic stuff upfront to fund a loan. What I’m talking about is stuff, title clearing, clearing the bank statement, and making sure there’s enough money in there to close the final things that are needed. Again, when we start the process, you’re just giving me the necessary information, and then we’re sorting through it. Our processors will now still search through that information and say, “Okay, we’re missing this item. Get us this item so that we can go to underwriting.”
Once the file goes to the underwriting processes, they’ll scrub all the information and then determine what else is needed to close the loan, so conditions missed will come out. Then we go back to the client and say, “Okay, it’s out of underwriting. These are the conditions that we need to be met for us to close the loan.” That’s what I’m talking about. Those pieces of information that sometimes they come in in the night hour and we were trying to close a deal. Once we get all the documents needed to fund the deal, we’re ready to go to support the loan.
Lucelia: Perfect, thank you. You answered my question on underwriting before I even get to ask. Those who don’t know what underwriting means are the process where the bank or the lender itself is going through the paperwork and the documentation to assess that everything is complete and ready to go for closing. If something is missing, then that’s when you’ll hear back with additional requests and stuff like that.
Hector: Correct. The underwriter’s job is to scrub through the documentations. That is the reason why we want you to be forthcoming upfront. To let us know what it is that we’re dealing with so we know how to act around it because we have to present the story to the other end and explain to them, “Look, these are the situations, this is what we’re doing.” so we could move forward. Because if the underwriter doesn’t know the story, it will go to the people who can see what’s missing or anything that is false information or what have you.
Again, the underwriter will do their due diligence and confirm what you have told me. For example, if you have told me I have two investments in the last two years, he confirmed that you had made an investment in the previous years, yet I’ve seen attached that information. The impression you didn’t stick that information, then it doesn’t matter. That’s the reason why you tell us up front what you’re trying to do, what your background, what’s your history is, and then we decide, “Okay, here’s what’s going to fit you best. Here’s your pricing; give me the documentation, and we go forward.”
It’s a pretty simple process. Many people tend to overthink it and think they need a lot of stuff, but there’s not much when it comes to investing because of asset-based. We don’t require anything from the documentation. People are always afraid, “I don’t make enough money to cover.” That’s not the point. The point is if the property makes sense for you to purchase, you have 20% to put down. You’re going to sell it for a profit. Then you can get in and use our money to buy that property instead of having to come up with more money. 20% to 50% is the average out there.
Lucelia: Right. For those who don’t understand asset-based terminology, it merely means that the money that will be lent to you will be based on the property’s income versus the traditional mortgage. It’s based on how much money you make. That’s where Hector is making that distinction. It doesn’t matter how much you earn because we will focus on how much money the property is making. How much potential the property has in this case.
Lucelia: Great. For everyone looking to make more money to continue to invest in your real estate portfolio, Patch of Land has a broker and an affiliate program that you can join and make money. Is that correct, Hector?
Hector: Correct. The broker program is there’s a particular state. Every state is different. In some states, you need to be licensed as a broker to sign up as a broker, but you would sign up as a broker with their company and get clients just trying to send you business. The program that we have, we actually will send you with your landing page, put your logo, your phone number on our marketing materials. It will have everything that we do but have your information on it.
We’ll set you or put the landing page where you can send information, that marketing material to your client. They will click on that site, go directly to us, but you will be connected to that client forever. Brokers can charge whatever they want on their end. We make our points, and then the broker will charge them once. As far as the affiliate program goes, that’s for someone who wants to refer somebody, who wants to give me a name, give me a phone number and just handshake, introduce us, and then I’ll take over that client, try to close that client.
If we do close along with that client that you introduced us to, you will make half of point on the back end, which means once the loan closes, whatever the loan amount that we closed on that client, you’ll make half of a percent on that. That is the only information required for that as we get signed an agreement. Send us a W9 because the company will 1019 at the end of the year, which means they’re just going to report they paid you an extra amount of dollars for the year, so you report on your taxes.
Lucelia: Whoever wants to be a part of the affiliate program or become a broker they don’t need a license or any LLC or Legal Entity set up. They can certainly do it under their name, correct?
Hector: The broker has to be licensed. There’s a particular state that requires a license. Suppose you’re familiar with your state, that particular state that will require licenses. The majority of them do not. I would say 90% of the states do not need to sign up on our site if you go to Patch of Land/Agent Perez. You will see the information there and sign up for the broker program or the affiliate program.
If you have any questions if you have any concerns, we’re more than happy to help, especially new investors. We have a lot of questions. I understand it does get a little daunting as far as trying to invest, but it’s really in the process of not that difficult. You can reach me at area code 424-308-0342. Again, that’s 424-308-0342. Give me a call. I’m more than happy to walk clients through the process.
Links mentioned in the video:
– To get in touch with Hector Perez: http://moneylenders.com/novarise
– Hector Perez’s number: +1-424-308-0342
– Difference between commercial and residential loans: https://www.novariseinvest.com/business-credit-vs-personal-credit/– Best legal entities for real estate: https://www.novariseinvest.com/maximizing-the-new-tax-code-guide-for-investors/
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