What’s the Impact of the Residential Housing Market on Commercial Multi-Family Deals?

There’s no denying the impact of the residential housing market fallout on the commercial market, but what many folks don’t realize is that while the residential market and the commercial are related they are actually completely separate markets.

What makes the headlines on the newspapers and on the evening news every day is what’s impacting most Americans and that’s the residential market. Banks are going under, housing prices are down, foreclosures up, but it’s pretty easy to lose perspective on the bigger picture.

For example, while many Americans are certainly behind on their mortgage payments and the market is falling apart, did you know that 95% of loans are actually current?

But how does this roll over to the commercial multi-family family marketplace? With the drastic reduction in banks that are lending, and much stricter lending practices, we’ve seen two major changes.

First, while in the spring, our mortgage broker could shop one of our deals past 81 qualified banks that would be interested in large 150+ multi-family deals like the ones we have, that number dropped to 8 in late September and 6 in October. That means that while there are drastically fewer banks lending, the money is still there for the right deals.

Secondly, it used to be that most loans would only require one signature from the underwriting department unless anything out of the ordinary came up, but now they almost all require two signatures (one from the underwriter and one from their boss) and if ANYTHING is out of the ordinary, a third (higher) signature is required.

In the case of our latest acquisition, Preakness I & II in Lexington, KY, a 222 unit multi-family property, this meant that the bank we’d been working with all along that had moved forward on the appraisal and environmental suddenly slowed down come September to the point that we couldn’t get a firm closing date out of them.

We decided to switch banks to get the deal closed and managed to go from first conversation to a closed deal in under 30 days. That’s unheard of in this marketplace, especially considering that the loan’s terms are phenomenal. It’s a 10 year note (9 years fixed) with the first two years interest only, unlimited assumptions, and provides the ability to re-leverage three times.

If you’re putting together your own deals, remember: the money is out there; it’s just more difficult and takes longer to obtain. If you have no interest in dealing with the banks, but still want to own large multi-family property, can pass our investor screening, and have at least $100,000 to invest, let me know, as there may be a way for you to own large deals with all the benefits of ownership and none of the hassle.

Our Portfolio now has over 800 units and you might be surprised to learn that you most likely know some of our investors as they’re readers just like you coming into our deals with cash or self directed IRAs. Stay tuned for next month when we take a peak at the industry’s view on what what’s coming in 2009 for the multi-family industry.


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