Commercial Real Estate Financing – Lending Basics: Servicing

So many lenders! But who is lending? Group picture from CIY in Southern, CA

Greetings from the metropolis of Cedar Crest, NM.  I am back from a fun-filled week in Southern California with my youth group.  Twenty three young adults and four adult leaders (including myself) attended a week-long CIY MOVE (www.ciy.com) event that was mind blowing.  Again, just like when I returned from Bolivia this summer, I am returning home a little more different then when I left. I am seeing things, myself, and everything for that matter….differently.

Anyway…..

Today’s topic is a continuation of financing commercial real estate investments.  We are trying to give you a very basic understanding of the “lending” side of things with regards to buying commercial real estate.

So…….

There are several aspects to obtaining financing for the acquisition of a commercial property. This post will focus on the duties of a servicer and outline this person’s crucial role in the commercial lending process.

What does a loan servicer do?

A commercial loan servicer is an entity that collects, monitors and reports loan payments, handles property taxes, forecloses on defaulted loans, handles late payments and manages insurance escrows. Many commercial lenders also service their own loans. However, some lenders only originate and fund loans and then sell the loans to a servicer to handle the maintenance issues of the loan until the entire debt obligation is fulfilled.

How are loan servicers paid?

Loan servicers make money from small fees attached to payments made on loans. The fees usually are .5% or less of the periodic interest payment. This means that if a mortgage balance is $200,000 and the servicing fee is .5%, the servicer can retain ((.005/12) x 200,000)=$83.33 of the next payment before passing the rest of the payment to the loan note holder.

Loan servicing is traded in the secondary market like mortgage-backed securities. Servicing strips, which are securities created from cash flows resulting from servicing fees, are the commodities traded. These strips are used for valuation of the security when traded on the market.

What can my servicer do for me?

It is important to know who will be servicing your loan when you are in the process of obtaining financing. By understanding your potential servicing partner’s policies, you can develop the right financial planning strategy. For example, if your lender does service the loans they make, they may have more lenient policies for prepayment or delinquencies because they will want to retain you as a client for future deals or refinancing. Lenders who do not service their own loans may not know the full servicing policies of the companies they sell their loans too. If you are obtaining a loan that may need to be refinanced in a few years, it is important to know what options you have.

I hope you are learning from our blog.  Please be sure to register to get our free video series on investing in commercial real estate.

Until next time……rob

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