Peter Pays Paul

Commercial mortage brokers get paid based on the value they bring to the client in a transaction. The truly successful brokers bring value to their clients consistently.

2009 forebodes to be a difficult year for certain commercial real estate sectors. Much in the residential real estate industry has changed since 2006, we can expect similar changes in the commercial real estate. They key is to be one of the survivors that come out on the other side.

Adding Value

Most borrowers would not pay a broker’s fee if they did not get something in return for it. A commercial mortgage broker must provide something  the client “needs”.

The client may “need” a smoother transaction, a greater selection of lenders, a higher LTV, a lower rate, or more flexible loan covenants. In exchange for this the broker receives their loan fee.

All of these were solutions to problems that a broker could provide that might not have come through direct contact with an institutional lender

In the current market brokers are having more difficulty providing these items of value. LTVs have decreased, rates have gone up, and many banks are only lending to existing customers.

How does a broker survive and add value in this market?

Bring Equity

A broker that was able to provide an equity injection to a property that needs refinancing will have no shortage of business. Borrowers that cannot qualify for a refinance with new, lower values may be open to a fresh equity injection to facilitate the refinance and ownership of their property.

Offering this as a solution to a borrower’s problems will make it more palatable. Many borrowers may balk at this idea at first.

However, if the only alternative is foreclosure, this idea is likely to become less offensive.

Finding Equity

This will require some work on your part as the broker. Finding reliable and reasonable sources of equity capital. The equity investor must have the funds available to respond quickly. They also must not be so greedy as to kill a deal and offend your borrower.

One way to do this is call your existing database to see if they know anyone that might be willing to invest in projects for an equity position. Some of your existing clients may have extra cash that they would be willing to invest in the right project.

The deal structure will need to be worked out between your equity investor and the borrower.

Commercial mortgage brokers need to continue to add value to their clients’ transactions in this difficult financing environment. How do you plan to do this for 2009?

Photo credit: somethingstartedcrazy

Commercial mortgage brokers would do well to take 15 minutes to get acquainted with the lenders on their lender list. While a rate sheet and lending matrix can be helpful, nothing beats a phone or face-to-face interview.

Here are nine questions that will allow a commercial broker to focus their efforts and to target properties to the right lenders.

1. What are your minimum and maximum loan amounts? - Calling a lender with a deal that is either too big or too small is a waste of your time and theirs.
2. Do you have a geographical limitation? – Some lenders can only lend in certain metropolitan areas. A loan outside of these areas is an automatic “No”.
3. What property types do you prefer? – You don’t want to take a loan on an auto body shop to a company that only finances apartments.
4. How long does your average loan take to close? What is the shortest amount of time you have personally seen a deal close? – This is very important to ask if you are dealing with 1031 exchange properties. It can help you weed out lenders for deals that need to close quickly.
5. What is your maximum loan-to-value ratio? – This helps you to eliminate lenders that cannot provide the leverage your borrower needs.
6. What is your minimum debt-service coverage ratio? – Along with the question above this helps you to determine the amount your client can borrow based on the properties income.
7. What information do you require from the borrower in a loan package? – It is frustrating for a lender to receive a trickle of information about a loan over a period of days, weeks, or months. Knowing beforehand what a lender needs, you can  assembled all the necessary documents before you send it to the lender for review and hopefully a quick answer or LOI.
8. What is the best way to contact you if I have a deal? – Contacting the lender through their preferred method shows a deference to working on the lender’s terms. It shows that you want to make things easy for them, not yourself.
9. What loans are you the most competitive on? – Sometimes lenders will tell you that they will lend on a certain type of property, and they probably will. However, the rate, LTV, or DSCR will make it practically impossible to get a loan from them. This question helps to narrow the scope to only the properties they can offer competitive financing for.

These are my nine suggested questions to ask your commercial lender. Do you have any others that you would recommend?