First year in real estate at college, and i’m doing a paper on commercial and residential real estate. I’m suppose to show the differences between them. When it comes to financing for them, im having a hard time finding information on them, other than the basics. So i guess my question is " What is the difference (if there is one) between residential and commercial real estate in the finance area?
Thank you so much
Korin
When I do the underwriting to match the numbers to certain banks or lenders, they all have a guidline.Both can be income producing properties if you have good tenants. Difference, is that commercial is harder to finance. We look a last 2 or 3 years income and expense. The DCR. The NOI. Most are LLC. So we would want executive summary and business financial. As you can see, more work. Residential depending on the bank, should take 14 days to close or less if all your ducks is in a row, and you have qualified people to do their job right. Some bank will take 30 days, because the volume. Commercial loans should take 30-45 days on average to close, if there is no surprise. Believe me, banks do make mistakes. Learn from it and move on. If you want qualified research ask someone who is doing it. When you do your thesis and research, always get a few more experts opinion as well as facts.Hope this help. Good luck on your term papers. Hope you get an A.
To add to Johnny Q’s comments:
One difference is that “residential” financing applies to 1 to 4 units. Any property with more than 4 units requires a commercial mortgage even if the use is solely residential. In our area, commercial rates for multi-residential property are currently .5 - 1% higher than residential rates, with more points, fees, paperwork, time and hassel. We had to go through a commercial mortgage broker, not our usual residential mortgage broker. … and we had to use a property inspector licensed for commercial inspection instead of our regular residential inspector.
For a residential mortgage I think the lender looks most closely at the credit worthiness of the borrower and appraised value of the property. For commercial, revenue vs. expenses is the key criteria, followed by the other factors.
We’re in upstate NY, things may be different elsewhere.
My advice would be to interview a residential mortgage broker and a commercial mortgage broker and compare and contrast.
The residential real estate market (1-4 units) is much more mature and evolved than the commercial real estate market. Underwriting, financing, appraising are all much more standardized and thus much easier to accomplish and at a lower cost. Much of this standardization and efficiency is due to the involvement of semi-government agencies such as FNMA, GNMA, FHLMC. These agencies facilitate funds flow from capital markets to the home finance market through acquisition and securitization of single family mortgage loans.
Commercial real estate on the other hand is more unique and thus requires more customized underwriting. Properties are typically valued using an income/discounted cash flow analysis which carries many more variables and requires a more experienced appraiser and underwriter to adequately evaluate. The risk of lending on commercial properties is greater than single family properties as well. The dollar amounts per deal are larger and if the property fails the borrower is more likely to walk away as compared to walking away from your primary residence loan.