Seller asking for Commercial Financing on 3 Unit?

Question

Sent over a P+S agreement to the seller (through our brokers), which was verbally accepted, but the seller didn't want to deal with my big-named bank (I've already secured a conditional approval from them on a residential investment property).

This unit is a 3-unit property.

In the new Purchase and Sale agreement the seller is requiring a commercial loan.

Is it even possible to secure a commercial loan on a 3-unit property?

Timothy Maloney · Answer

The property type doesn't matter.   I do commercial loans on SFR, Condos, 2 units and larger all the time.   If I had to guess I'd say the seller is avoiding strict FHA type requirements -or- wants a more sure thing.   Chris M was on point above.

Kevin Kruska · Answer

Thanks, Chris! Good, strong advice. I am actually working in Des Moines with two family-owed banks. They are treating me pretty well, so far!

Kevin

Chris Mason · Answer

@Scott Taylor,

Sellers can be judgey about the financing you have lined up, or that you believe you have lined up. Big box retail banks do indeed have a reputation for being useless, late, and unreliable, in our area. Big national banks are geared towards 60 days closes. I'm guessing your contract says 30 days. Any listing agent looking at a preapproval letter from Wells Fargo that's attached to a purchase contract specifying 30 day close of escrow is going to laugh, and rightfully so.

But, anyways, since the false dichotomy here is between a useless big bank, and commercial financing (why isn't "use a reputable local residential non-big-bank mortgage lender" an option here, again?), there should be a staggering price reduction if the seller is requiring you to use crummy financing. Calculate how much extra you're going to pay over the next five years using commercial, and counter offer with the price discounted that much.

Meanwhile, happy with your discount, make sure your commercial financing doesn't have a prepayment penalty, and refi that mothertrucker into residential 30 year fixed five seconds after closing. It's that old kung fu thing where you don't confront or block the blow, you do ninja magic to redirect the momentum to your advantage - you got the financing you want AND a discount.

EDIT: Now that I think about it, it's possible that the reason the seller "doesn't want" to deal with the bank and/or residential is because there is some reason the seller knows that it can't get residential financing. You will want to know that before you close, as that could both kill the refinance into residential 30 year fixed AND significantly harm resale value. I'd get a residential mortgage appraisal, ordered through a residential lender (so that same appraisal can be recycled later and you don't have to pay twice), during your inspection period to identify if that is the case or not.

Wayne Brooks · Answer

The seller, and their agent, are misinformed.  Your agent should be able to educate them.

Timothy Maloney · Answer

Chris Mason  A few borrower motivations:  Non-recourse loans, off personal credit, and poor personal credit.   In commercial we look more at the property (and it's ability to cover the debt) than we do at you personally.    Sure, a 625 FICO will hurt your rate but it won't be a deal killer.

I have a few people who are up to 30+ properties and to hold them personally would approach impossible as lenders would look at the deal and just take a pass (rather than seek to underwrite the person's 30 other properties).

Dustin Lauer · Answer

@Scott Taylor yes it is totally possible to get a commercial loan on a residential 3 unit property.  @Timothy Maloney is correct that is does not matter the asset for the loan type.  In fact, a pretty high percentage of residential investment property loans are considered to be "commercial loans."    I also, am a Lender, and I've noticed I finance about 75% of purchase deals on cash contracts without financing contingencies.   So it definitely appears to me that sellers and seller's agents do far less diligence to find out if a Buyer really has the cash, than they look into a Buyer's ability to get financing.  (*** I am not advocating to not disclose or improperly disclose financing on a contracts, but it good to know that Sellers seem to disproportionately weigh a Buyer's ability to get financing than they do a "Cash" Buyers  ability to actually pay cash).

Chris Mason · Answer

Just out of curiosity, what is the typical motivation to use commercial when it's an SFR? Just the fact that you as a commercial lender are able to ignore the $1400/month in car lease payments?

I don't interact a lot with commercial because I just find ways to shove it into residential. :P

Chris Cambridge · Answer

Fact is you can get a commercial loan if you purchase this in a corporate entity. The loan can be fully amortized. My question is what's the seller's problem with that bank (maybe a past grudge)? Maybe they pulled on last buyer, who knows.

Darryl Dahlen · Answer

I'm still wondering how they think that you could get a commercial loan on a residential property?

Matt Boettinger · Answer

you are better off with a residential loan.  Commercial loans typically  have balloon payments.  You want it to fully amortize.

Seller asking for Commercial Financing on 3 Unit?

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