Commercial Note Purchases - How Does It Work?

[Brett Burky]

Commercial note purchases are different from residential and we'd like to learn from experts in BP on how that happens. What are the glaring differences? Is it less or more steps in the closing? Is anyone an expert in the subject matter that we can lean on for advice? 

[Don Konipol]

@Brett Burky

USTs are underground storage tanks. Which can of course leak and depending on the material stored in them can be the cause of extensive environmental damage.

Ive originated over 600 commercial mortgage notes and purchased about 50 others, usually 24-60 months into their life cycle. In purchasing notes, I look for notes in default with a situation I can rectify. But I have also purchased performing notes at deep discounts, from sellers who needed cash immediately.

When a residential note is secured by a SFR in a cookie cutter subdivision, evaluation of collateral is relatively easy. Since comps are plentiful and similar, it's usually just a matter of adjusting for property condition. Further, for performing residential notes, running a borrowers credit score is usually sufficient.

Commercial notes are a different animal. Valuing collateral commercial property is a best estimate, with years of experience, training, education and specific knowledge required to even approach accuracy. Problem is even the most qualified appraisers often miss the mark. ... sometimes by wide margins.

In tenant occupied properties the tenant quality may be more important than the relative financial strength of the borrower. And going business concerns are not easy to evaluate. Further, a borrower with multiple properties will not lend himself to quick credit evaluation. If the property is owner occupied by a business than that businesses financial results, as well as strengths and weaknesses becomes part of the equation.

My experience is that there’s money to be made in both the residential and commercial note markets. I believe that at every level of risk the commercial note carries a 2-3 percentage point positive return over the residential note. So when a residential notes at a certain level of risk are offered at a 8% return, commercial notes with the same level of risk will be offered at 10-12% return. I have no proof of this, my evidence is just empirical.