The mortgage market in Ontario can be divided into two major areas of expertise: commercial and residential financing. Of course, in either specialization there can be sub-specializations. In other words, a commercial mortgage broker may focus on financing industrial complexes as opposed to apartment buildings. Likewise, a mortgage broker specializing in residential financing may decide to focus on refinancing, renewals, etc.
It’s important to keep in mind that commercial mortgage financing, although very lucrative, is also extremely specialized. It is not uncommon for a commercial transaction to take three months or longer to be completed. In addition, if a mortgage broker who has not completed a commercial transaction before attempts one, that broker is apt to find that there are substantial differences, from the security or property involved, to the underwriting process. A common phrase that “you don’t know what you don’t know” are words to remember for commercial transactions. A residential broker with no commercial experience may attempt to apply the residential process to the commercial transaction because he or she doesn’t realize the differences. This can only lead to confusion and frustration for both the broker and the borrower.
Mortgage brokering in Ontario is regulated by the Financial Services Commission of Ontario (FSCO) and requires a license. To obtain a license you must first pass an accredited course. The Real Estate and Mortgage Institute of Canada Inc. (REMIC) is accredited by FSCO to provide the course. For more information please visit us at www.remic.ca/getlicensed or call us at 877-447-3642.
6 Major Differences Between Commercial and Residential Mortgage Transactions
The property types of a commercial mortgage transaction are significantly different from residential. In a commercial transaction ICI, or Industrial, Commercial, Investment type properties are being dealt with. These can include:
- Apartment buildings
- Office buildings
- Strip plazas
- Shopping malls
- Recreational properties such as a golf course, etc.
To be able to provide sound advice to the potential borrower, the mortgage agent must have intimate knowledge of the workings of the property that is the subject of the financing. Without such knowledge the broker will ultimately fail to ask the appropriate questions.
To appraise a residential property in Ontario will normally cost in the range of a few hundred dollars, depending on where the property is located. For example, in the GTA an appraisal may cost slightly less than three hundred dollars. In a commercial transaction an appraisal may cost from a low of $2,000 to a high of $50,000, depending on the property and the scope of the appraisal, and may take up to three months to complete. It is important to know what appraisal requirements are involved, based on the potential lender, before requiring a client to pay such a significant amount for an appraisal.
In many cases at least a Phase 1 ESA (Environmental Site Assessment) will be required by the lender. This is to determine whether there are any contaminates in the property. If there are, a Phase 2 and Phase 3 may be required, which can take several months to complete and several thousand dollars in costs.
To determine the viability of a commercial mortgage request, the broker must look at the type of property. If it is an incoming producing property such as an apartment building, then the Income Approach of appraising a property will be used. The broker must be familiar with the Net Operating Income, how to standardize it and what should be used and excluded within it. If it is not income producing, then typically the broker will have to obtain financial statements from the corporation applying for the mortgage and be knowledgeable enough to decipher and interpret them accurately.
The commercial lending market in Ontario and Canada as a whole is quite small, limiting the number of options available to a broker. This has also resulted in commercial lenders being very selective about with whom they deal. Most commercial lenders do not like dealing with inexperienced brokers. They also have certain requirements regarding application submissions to which brokers must adhere.
While a typical residential transaction can be completed within two weeks (some can be funded quicker while others, such as purchases may close a few months after the initial application) commercial transactions can take anywhere from three months to a year, depending on the type of the transaction and its complexity.
Looking to expand your knowledge about commercial mortgages?
Learn more about our commercial mortgage courses: www.remic.ca/commercial
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