When real estate agents are asked about financing for their listed commercial properties, they often say “I don’t get involved with financing.” or “It is up to the buyer to find his own financing.” These agents may be missing big sales opportunities. It should be obvious that financing is one of the most important factors to a buyer of commercial real estate, and real estate agents cannot afford to continue to ignore it.

By offering financing as well as financial information in the sales process, an agent can enhance his sales opportunities in the following ways:

· The buyers will be more interested in the property

· The property value can be maximized

· The property can sell faster

· The sale can close faster

· Agents can make their commissions faster

This article will discuss what is important about financing to prospective buyers and their lenders, and tell what can be done to make each of these assertions come true.

Income

For commercial property, “income” generated by the property is extremely important. Income is usually the major factor in establishing property value. It is also critical to lenders in determining the amount of financing they are willing to provide. It is not unusual for a potential purchaser to ask about the income before he asks about the price. The same is true of lenders

Since “income” is so important, here are some guidelines to understanding it:

Primarily when we speak of income for commercial properties, we mean cash flow income. This is usually called Net Operating Income or “NOI”. NOI is computed by taking all of the rents (rental income) and subtracting cash expenditures. Depreciation and financing costs are excluded when calculating NOI. If an agent is unsure of how to calculate the NOI for a property, the agent may want to ask a local lender to help. Many lenders are happy to provide this as a service at no cost.

When a real estate agent meets with a seller to list a property, the agent must obtain the NOI figures for the last two years. After all, NOI is needed to establish the property’s value; buyers will ask for it and lenders will ask for it too.

This NOI calculation should be placed prominently in all advertisements, listings and set-up sheets. Without NOI, everyone has to guess at the proper value for the property (and probably guess low!) Many potential buyers will just skip over listings without NOI. Shamefully, as many as 40% of the listings and set-up sheets reviewed by this lender do not show NOI, or actually calculate it incorrectly. This may be a missed opportunity!

Investment return

Income not only sets the value for a property, but it also provides a return on the investment of the buyer. Believe it or not, financing plays a big role in determining the return. A good mortgage with a low interest rate and low fees can maximize investment return. The loan-to-value, the term of the loan, the amortization period and underwriting criteria all have an impact on investment return.

The investment return that is most often used is the cash-on-cash return. This is a simple calculation using the following formula

NOI – mortgage payment = Cash-on-cash return %

Cash investment

That is: Cash-on-cash return equals NOI minus mortgage payment divided by the cash investment. The result is expressed as a percentage.

The terms of a good mortgage loan can reduce the mortgage payments, (by reducing the interest rate, for example) and thus increase the top portion of this fraction and increase the return. Also, if the lender can increase the loan-to-value from 75% to 80%, the cash investment will be reduced and the return will also be increased.

Property listings that show good cash return will score big with potential buyers. This is what they are looking for. Unfortunately, fewer that 40% of the listings we receive include this information. Accordingly, real estate agents should work with a reputable lender to properly calculate the necessary information.

Pre-qualifying properties for financing

Many commercial lenders will pre-qualify properties for financing. (This is quite different than the tradition of pre-qualifying the borrower for a residential transaction.)

They may even provide a “letter of intent” to lend to a qualified borrower for an agent’s listed property. Of course, the letter of intent will be conditional, based on the information the agent provided about the listing. However, it will be very helpful to the prospective buyer. The letter of intent should include the terms of a loan on the subject property, which permits a calculation of this cash-on-cash return. The borrower will have the information needed to make an informed decision about purchasing the property. This should help the buyer make a quicker decision concerning this purchase.

If the buyer doesn’t have a lender to work with, pre-qualifying the property will give the buyer a head start in the search for financing. If the buyer does have a preferred lender, he/she will now have competitive quotes. (Who knows, the buyer may like the pre-qualifying lender better). This will help get the financing quicker and thereby, the sale will close quicker.

Conclusion

This article has covered some of the basic concepts for a real estate agent to use to enhance the selling process by using financing as a sales tool. To recap, the steps are:

· Be sure to show the NOI for listed properties in all advertisements, internet listings and set-up sheets

· Be sure to show the potential cash-on-cash return for listed properties in all advertisements, internet listings and set-up sheets

· Be sure to pre-qualify all property listings for financing

Real estate agents should establish a working relationship with a reputable lender to assist with the financing component of their commercial property sales efforts.

### END ###

About the Author

GEORGE C. UNSER is the Senior Underwriter for Sterling Commercial Capital, a nationwide commercial lender providing multifamily, retail, industrial, office, warehouse and special purpose lending. Mr. Unser enjoys working with real estate agents. Also, he can set up programs for real estate firms to ensure that they maximize the benefits of including financing in the commercial real estate sales process. Mr. Unser can be reached at 203-366-0320 or GUnser@SterlingCommercialCapital.com.

Article © Anywhere Communications All Rights Reserved