Cash Flow Business Tip of the Week- Commercial Real Estate Notes

commercialNote brokers are missing a great profit opportunity because they are unfamiliar with commercial real estate notes. It’s easy to assess a note on a home, but if someone calls you with a commercial note, you may not know how to price it, whom to sell it to and what kind of documents are required.

Definition of “commercial” real estate notes

The most widely accepted definition of “commercial” real estate notes is a negative one. Residential notes are not commercial notes; they are notes secured by one to four residential units. Commercial notes are not residential. Commercial notes include notes on mobile home parks, office buildings, apartment buildings, shopping centers, businesses, parking lots and government buildings.

A few institutions will buy commercial notes up to $500,000. This means their exposure must be under $500,000. If there is a first note for $100,000, they could invest up to $400,000. This is typical of other note buyers as well. There are many advantages to becoming an expert in commercial notes. You will have very little competition. You can develop a steady source of notes by working with professionals who will refer business to you. Commercial real estate brokers, developers and contractors see many such notes. If you offer a finder’s fee, you can open a veritable pipeline of notes. This is far more efficient than dealing with one note seller who only has one note to sell.

There are not many buyers of commercial notes. You want to develop a relationship with an institution that understands how to quickly underwrite your commercial deals. To sell a commercial note, you need to develop a professional “package” to submit to the note buyer. The more information you can provide, the more quickly they can fund and close the deal. Your package should include the standard information: a copy of the note or mortgage, a copy of the closing statement, any appraisals, pictures, insurance information, etc. In addition, you should try to obtain a Dunn & Bradstreet report on the business, a profit and loss statement (depending on the payor’s credit), and tax returns, if possible. On apartment notes, commercial note buyers will need information on the expenses of the building, gross income, seller’s purchase price and date purchased. On a business, they will want information on the new buyer: how experienced is he or she in the business? Why did the seller sell the business? What is the local competition?

While they do not need all of this information, the more you know about the payor, the business and the property, the greater is the likelihood that the institution can buy the note. Complete informational packages are what separate the amateur note broker from the professional.

Problem Commercial Notes

There are commercial notes that note buyers generally cannot buy. Although, with the competition growing among note buyers, who knows? Commercial notes that are hard to sell include such single use buildings as churches, notes where the payor is a charitable organization, nightclubs, motels, any property that may have potential EPA hazardous waste problems, such as gas stations, and commercial farms and orchards.

Many good commercial notes are out there. With a little perseverance and a bit of experience, you can make large profits on these notes.

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