Although there is no formal standard industry definition for what constitutes a small balance commercial loan, many consider a small balance loan to be under $10 million. Some argue that a $10 million loan is a large loan and believe small loans are below $5 million. For this commentary, our focus is going to be in the $1 to $10 million space.
Many lenders, brokers and mortgage bankers do not like the small balance loan business, as it is inefficient to invest in, broker, or place small balance commercial loans. Others in the industry believe that there can be efficiencies in investing in or placing small balance commercial loans.
Why small loans? A lender can create greater diversification in their portfolio by placing a large number of small balance commercial loans, rather than fewer large loans. A small balance lender often may achieve higher yields on an investment, as there is typically less competition for these loans. Due to the fact that there are a greater number of small balance commercial loans in comparison to large balance loans, there are more transactions to be spread across different industry players. Some lenders, mortgage brokers, and mortgage bankers have organized their shops to be efficient at placing small balance loans to take advantage of the greater number of opportunities in the lending arena. This is not something that is easily done.
To be an effective small balance lender or intermediary it comes down to a couple simple variables, organization and support. To be successful in the small balance commercial space you do not have time to waste. You need to be quick to underwrite, quote and process. If any part of the process breaks down, you lose profitability. Your staff must be able to manage the closing and post-closing/servicing process efficiently.
At Barry Slatt Mortgage, we are equipped to place loans of all sizes. We currently represent correspondent lenders that can make loans from $1-$100 million. For further information please call a representative in one of our 6 convenient office locations.
Commercial Mortgage Banker