Friday, February 17, 2017

Residential vs Commercial Real Estate: Two Entirely Different Animals

I'm connected to a lot of real estate agents all over the country through social media. And I am always watching the 'market' around the country through the eyes of my fellow real estate agents, just to have an understanding on what's going on. Though much of what goes on in the residential 'market' doesn't affect the commercial market and what I sell, the ability for my buyers to sell their homes in order to use the equity to purchase what I sell does affect what I sell. So I pay attention.

The other day I was watching a video on Facebook by a Realtor in North Carolina about what we provide to our clients as Realtors®. It reminded me that not all consumers understand the difference between a REALTOR® and a licensed real estate agent. And although that's really not really the focus of this post, it's important and there a few things you should understand. And then I'll get into the differences between residential and commercial real estate!

As a licensed real estate agent who chooses to subscribe to the Code of Ethics of the Realtor® organization, we agree to certain fiduciary duties to our client and uphold the highest standards when it comes to ethics and the law. Integrity. We care about how we represent our clients and nothing is more important.

Fiduciary duties are described as: a real estate broker who becomes an agent of a seller or buyer, either intentionally through the execution of a written agreement, or unintentionally by a course of conduct, will be deemed to be a fiduciary. Fiduciary duties are the highest duties known to the law. Classic examples of fiduciaries are trustees, executors, and guardians. As a fiduciary, a real estate broker will be held under the law to owe certain specific duties to his principal, in addition to any duties or obligations set forth in a listing agreement or other contract of employment. These specific fiduciary duties include:

  • loyalty
  • obedience
  • disclosure
  • confidentiality
  • reasonable care and diligence
  • accounting

Any licensed real estate agent who is not a Realtor® does not have to follow this standard. By whom would you want to be represented?

So what is so different between residential and commercial real estate? 

Residential:

  • the buyer's ability to qualify is based on their job, their debt coverage ratio (of personal income to personal debt), their paycheck and ability to repay the loan
  • there are all sorts of different loans for residential buyers that are not available to commercial buyers, such as Government-Insured (FHA, VA, USDA), Conventional, Conforming (Fannie Mae, Freddie Mac), Jumbo 
  • Private Mortgage Insurance (PMI) is required if the loan exceeds 80% 
  • typically amortized over 30 years (with options for a 15 year), with fixed and adjustable rates (ARMS)
  • a residential mortgage is secured by the property
  • a residential mortgage is made to an individual borrower(s)
  • buying a house isn't as discretionary as buying a business. Of course, whether to buy or rent is discretionary, but the residential housing market is more of a necessity than a discretionary decision. What and where to buy (if not renting) is discretionary.
  • the value of a residential property is market value, what a buyer is willing to pay. 
Commercial:
  • the buyer's ability to qualify is based on the business's cash flow, the amount of a downpayment the buyer has, the amount they would have for reserves, the condition of the property might dictate more held for reserves 
  • there are fewer loan options, such as an In-House bank loan (Non-Government Insured), Government Insured such as SBA 504 or 7a, (Small Business Administration), USDA, there are Short Term and Equipment loans, and ROBS or Self Directed IRA which use 401k funds to purchase a hospitality property by a formed C Corporation.
  • commercial loans are typically amortized over 20 or 25 years and are only fixed for 5-10 years (unless secured by SBA and that portion is fixed for 20), rates are often 1-1.5 points higher than residential.
  • a commercial mortgage is secured by a lien 
  • a commercial mortgage is made to a business entity formed for the purchase where the individuals are guarantors of the loan (often a corporation and an LLC are formed, one owns the real estate, the other owns the business) 
  • buying a business is completely discretionary. Nobody has to buy a business. 
  • the value of a commercial business is based on cash flow, not 'the market'. In some cases, a buyer is willing to pay more than the value, because they see what potential the property has and are willing to risk getting a return on the future value.
It's all about the numbers...

Whether I'm representing a commercial or residential buyer, my fiduciary responsibility to my client remains. Every buyer matters, every house or lodging property matters, and the success of our industry matters. Realtors® do our best to ensure the consumer comes first.

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