Between us we’ve bought three homes and sold two, and the last purchase was a little complicated because it contains two houses on one lot (nightmare for the assessor and finding comparable properties, and a nightmare for the bank to figure out how to finance it). As a result, we were feeling pretty knowledgable about the real estate purchasing process. However, we quickly learned commercial is a whole new ballgame.
Here’s the deal, the bank cares a whole lot more. Which makes sense, now that we think about – people are way less likely to default on their personal home mortgages, no one wants to lose their house. However, if your business isn’t working and it’s a sinking ship, well, you’re probably already in a whole world of hurt, but the payment on your property is likely to become unmanageable quickly if your business plan fails. As a result, commercial loans are re-evaluated every two to five years, depending on how risky the bank has determined you are. And by “re-evaluated” they mean you basically have to reapply for your mortgage and they MAY let you continue at the rate you started with OR they may adjust your terms. It’s pretty much an adjustable rate mortgage based on YOUR performance AND the market, which depending on how the market plays out and how your business plays out, could work in your favor OR could be a total nightmare.
Another fun fact. The bank also cares about if the business is owner operated or if you are buying it as an investment property. Using the same philosophy as homeownership, the bank figures you are a little more invested in success if you are the one running the business in the property vs. renting it to someone else. Good to know, should in the future we decide to abandon the business and convert to renting the space, the stakes will change (and good motivation to be successful!).
The loan approval process for commercial real estate is also different and managed by entirely different people than those who manage residential loans. So, say you have a loan officer you’ve enjoyed working with, you trust them and they know your finances inside and out? Too bad so sad, time to make new friends. And unlike the hungry loan sharks of the residential world (ever filled out a lending tree application and then spent the next two years unsubscribing from multiple lenders?), the commercial side doesn’t seem to be hungry for business (or at least not for business loans under $1 million). We called several banks, some who wouldn’t take on the project unless it was significantly larger and others who never returned our calls. Luckily, we are long time patrons of US Bank and they’ve been a tremendous partner, walking us through every step of the way. However, they were transparent up front - the approval process could take 45-60 days!!! YIKES. When we received the opportunity to purchase the space and our offer was accepted (which all happened suddenly in the course of a few weeks, as often does in the real estate world), that meant there was a chance that we could go through due diligence, our earnest money would go hard and our loan still might not be approved. SCARY.
Bottom line, if you’re thinking about investing in commercial property, jump on your financing ASAP! Thankfully, we received our approval about a week before our due diligence deadline, just the first of many hurdles to clear.
