Could you explain more about Securing Finance?

IF YOU THINK about the traditional approach to buying commercial property … this is the process it basically follows.

After you find the property you then finalise negotiations and go to your finance source, to agree an indicative basis for the loan.

You may have already done that before you purchase. And while it’s not a commitment – at least you have a feel for what the lending basis will be.

Then once you have bought the property, you go to your lenders with the contract; and they instruct a valuer to undertake a formal valuation on their behalf.

Once that comes in, they are then in a position to finalise the loan terms and the actual amount being lent – based on the valuation.

Assuming all goes according to plan … you would then proceed to settle on the property.

Not the best approach for you

When I first started acting for buyers in the early 1990s, I quickly discovered there were quite a number of shortcomings in this traditional approach.

What’s really sad is that investors over the years have simply been prepared to put up with these shortcomings, rather than address and resolve them.

In other words: they haven’t complained enough for anyone to do anything about them. And so, maybe it would be worthwhile flagging three of these.

Shortcoming #1

The valuer appointed by the lender may not confirm the contract price you have agreed to pay.

With residential property it is not so much an issue – because for houses, you generally have enough similar properties to know how much it is worth.

Most finance sources are comfortable that houses sold at an auction reflect a fair market value. Therefore, they tend to accept that as the figure. And invariably a valuer will come in at the contract price.

That is not the case with commercial property, because valuers still remember the property crash of 1989 – where commercial property values plummeted between 40% and 50% virtually overnight.

At the time, valuers were happily assessing these properties at high levels, in relation to what was being paid for them at the top of the boom.

Nowadays, commercial valuers can be rather conservative. And it won’t always follow that your negotiated price (even if you think it’s a good) … will actually be confirmed by a valuer.

Shortcoming #2

The main drawback of locking into a single lender is that you are effectively surrendering total control over your financing arrangements to them, from that point onwards.

Shortcoming #3

If something does go awry between agreeing to run with that lender and agreeing the loan terms … you have nowhere to go.

You see, just 3 weeks out from settlement, you have no option but to agree to the lender’s modified terms.

For example:
What can often happen is … knowing they have the upper hand, your loan officers can come back to you shortly before settlement saying they have just received a memo from the “Credit Committee”.

They are a little concerned about the economy at the moment … and now require you to provide some additional security.

It may be a lien over your business, or that you need to lodge the title of your house with them – to keep the credit committee happy.

At that point, you certainly don’t have much choice – because they have organised everything, and are in total control.

What can you do 3 to 4 weeks out from settlement? It would be very difficult to rush around and get another valuation; and the next source of finance will probably look at you askance anyway.

Therefore, by resolving these specific issues … I reasoned this would will allow you to sleep more soundly.

The Obvious Solution

With commercial property, you are unlikely to buy it subject to finance – as vendors are not keen to take their property off the market. Because, they know that getting finance for commercial property is a lot more complicated than for residential property.

However, you do not have to actually have it subject to finance.

Instead, what you need to know is the figure up to which a valuer
would be prepared to support, for the specific property.

In other words: if you know that in advance, it gives you the comfort of not paying too much, when you finally get to sign the contract.

It is just a simple change. But there are then no surprises, when it comes to going to a finance source – because you already know what your loan-to-value ratio will be.

Can anyone set up such an arrangement?

The obvious answer is “Yes” anyone can … but you need to understand what you are seeking. You are asking valuers to provide you a professional opinion as to the figure up to which they would be prepared to support.

To achieve that, you either must be a professional investor (or at least a regular purchaser) in commercial property. Otherwise, valuers will charge you a fee for that advice; and then it starts to become an expensive exercise.

They will not necessarily charge you a full fee because they are not preparing a full report.

Still, they are putting their credibility on the line; and that involves professional indemnity issues.

However, because I already have a relationship with the valuers and regularly work with them … they do it for me do it at no charge – based upon the amount of business I bring to them through my clients.

It’s based on an ongoing relationship; and they are prepared to give me this “off the record” advice – knowing they will ultimately the instructed by my client … to carry out the formal valuation.

Several other Benefits

As you now appreciate, the upfront benefit lies in securing the property at the right price – by not exceeding the figure the valuer has provided you.

However, what you do next is what effectively puts several lenders under active competing for your finance needs.

The secret: You never want to lock yourself in to only one lender. And by engaging a finance broker you’re able to ensure you that choice.

Generally, the actual loan terms and conditions won’t vary all that much.

However, armed with a copy of the valuation … your finance broker can often find a lender offering a special deal deal.

Sometimes lenders need to re-balance their Loan Books – because they have too much residential or car financing – and they require more commercial property loans. Therefore, for a short period, they are prepared to lower their rate by 1% or 2%. And your broker is the one who will know that.

Even after achieving a really good rate, some other issue could emerge as settlement approaches. But you’re now in a position to swap to another lender – because you are the one who instructed the valuer to prepare the formal valuation … NOT the initial lender.

What is important is that you retain control over the financial process all the way through to ensure that they are no nasty surprises at the end.

So quite apart from being able to sleep at night knowing you paid the right price … you can now also cope with any surprises that emerge (between purchase and the settlement date) – as YOU are the one who is now in control.

Hopefully, you’ve found these several insights on Securing Finance to be helpful.

Some Feedback so far …

The impression I’ve gained is that receiving Answers on a weekly basis could perhaps be a little too frequent. So from now on, let’s drop it back to every second Friday … and see how that works out.

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