Daily Observations - Residential Issues

Tonight I want tot look at how residential real estate is being treated by commercial lenders as a form of collateral.

First of all we have had over the last couple of weeks commercial lenders totally discount to zero the value of residential real estate as a form of collateral for SBA Loans. We used to be able to pledge any type of real estate as a form of collateral, residential or commercial. But today the only form of collateral that the lenders are comfortable is commercial. I believe that is because commercial real estate has two forms of value.

The value of the real estate, but also the income value. If a lender takes back a commercial piece of property they can usually receive the income associated with that property should they elect to keep the property on their books in the unlikelihood instance that they are not able to sell the property.

The second way residential is being effected has to do with how SBA looks at equity. SBA requires a lien on all property that has greater than 25% equity. Therefore even if you are buying a commercial property if you have greater than 25% equity in any of your other property, ie. your personal residence` SBA will require that the residential property be taken as additional collateral.

So don't exaggerate your equity to make the banks feel more comfortable with the loan application. In essence its is now better for your commercial borrowers that they understate their equity. Chances are that the desk top appraisal software that the commercial lender uses will be much lower than the borrower thinks his or her property is worth.

Visit loanforbiz for updates to the SBA program as they are occurring.