Anytime an individual borrows money there are an inherently some benefits and drawbacks. This is especially true of the commercial real estate industry where a property’s income potential and a borrower’s credit worthiness may not tell the whole story of whether or not a multi-million-dollar loan makes sense.
As a commercial real estate agent, however, it is your job to make sure your clients are well informed about all their financing options. These include both traditional lending institutions like banks, as well as alternative solutions like private financiers.
Once your client is knowledgeable about his options, he can determine which terms would benefit him the most based on his current situation.
Banks
Pros
- Normally offer the lowest mortgage rates on the market
- Traditional loan qualification guidelines lower a borrower’s risk of default
- Loans can be long-term, spread out over 20 years or more
Cons
- Rigid down payment, income verification and credit score requirements
- Won’t often lend on non-conforming product types
- Lengthy approval process, with money taking as long as 90 days to be secured
- High pre-payment penalty fees
Private Financing
Pros
- No set lending requirements. The two parties can come to their own terms
- Funding can be secured extremely quickly
- Loan qualification process is often less complex and time-consuming
- Less money spent on fees and closing costs associated with the loan
Cons
- Loans traditionally come with higher interest rates
- A high return on investment is usually expected
- Most private loans are short-term
- Must show the property’s income potential
- Must create a realistic exit strategy
- The real estate one seeks financing for acts as the loan’s collateral
- Depending on the loan-to-value ratio, borrowers may need to cross-collateralize to obtain their full requested financing