2010 has been quite an interesting year for most folks in the commercial arena and I suspect 2011 is going to be even more interesting. Many of us in the financial sector found ourselves heavily involved in the process of re-educating clients. And if you’re wondering why, here is the reason. During the past decade a plethora of commercial loan products have been available to investors. Credit was accessible to almost everyone, lending guidelines lenient with limited documentation, real estate values became artificially inflated, and interest rates driven to their lowest point in decades by the central bank. But nothing lasts forever and so is the case with the easy credit era. One of the differences between yesterday and today is that back then banks were competing for clients while today clients are competing for money.
I often hear the “But I didn’t have to do this when I last applied for a commercial loan” so I thought of writing down a few good ideas from the lender’s side of the fence. Therefore have patience and walk with me for a few minutes the path that could lead to a loan approval for you. Whether you’re ready to purchase a new commercial property or if you have a need to refinance your current loan the following ideas will come in handy for you. So let’s start with whom you’re going to approach and how selective you must be in your decision.
Idea #1 — Today there are still plenty of viable lenders that make loans via brokers. Brokers are seen as the gate keepers of the kingdom. A good broker knows if your transaction is feasible and he’ll know how to present a loan package worthy of the lender’s time. You can benefit from the experience of a seasoned broker because he knows what lender would have an appetite for your particular transaction need. I know bankers have been trying hard to blemish the brokers’ reputation but many honest and hard-working brokers are still willing to work after hours and week-ends to find a solution for you. How many bankers were you able to reach after 5:00 p.m.? Besides, bankers love their guaranteed salaries plus commission compensation while brokers don’t make a paycheck until their clients’ loans close. The bottom line is that you’d want to associate yourself with honest and experienced professionals. And don’t always assume that a friend’s referral would be your best option. I once used a contractor that was highly recommended by my dear neighbor. Well, let me just say that it was not a happy ending.
Idea #2 — Evaluate your professional consultant. Is there a good communication between the two of you? Does he listen or does he talk all the time? Use your instincts, if something doesn’t seem right you’ll know right away. Most importantly does he tell you everything you want to hear? If so, chances are you’ll feel good for the moment but that’s not going to get your loan approved. The job of a professional is to set realistic expectations for his clients and many times that entails hearing things you don’t want to hear. Do remember that during times when money is scarce it’s not uncommon to expect challenges. Expect lots of questions and be prepared with answers.
Idea #3 — If you end up working with a broker, does he have strong relationships with a few viable lenders? Direct relationships with lenders are vital and you want to be sure your broker is not sending your loan to a lender via a broker daisy chain. Lenders can immediately figure out if your package came directly from your broker or from a daisy chain of brokers. A loan package submitted via a daisy chain is not taken seriously by lenders.
Idea #4 — Don’t expect exact rates and terms on your loan based on verbal communication with your mortgage professional. You may be able to get an idea but don’t take it as being set in stone. Your physician will not give you a diagnosis on your health without the proper screenings and tests. Nor will a broker or a lender give you the terms and rates of your loan submission without a well documented package.
Idea #5 — When you start the process be sure you are ready to move forward. The information you get today may change tomorrow. At the same time lenders don’t wait for those who are not ready or are not prepared. Remember that there is high competition for money today, and lenders are efficient when looking at packages from active borrowers. Keep in mind that a good broker will also not want to ruin his relationship with his lenders over passive borrowers. The lender/broker relationship takes time and effort to be built and it could be lost if the borrowers behind a few deals are not fully committed. Good brokers place outstanding value on the limited sources of funding therefore they won’t be willing to put the lender relationship in jeopardy.
Idea #6 — Be upfront with your consultant. Tell him the strength of your transaction and any potential problems. If your credit is not the best let him know but don’t spend half an hour justifying your low credit score. If your local bank declined your loan tell him why. Last thing you’d want to do is wait weeks for the lender or broker to find out what they could have known upfront from you.
Idea #7 — Be prepared to provide lots and lots of documentation. If you’re not, believe me, other borrowers will. Lenders love well documented packages. Think of your consultant as your lawyer putting together your file to prove your case in front of the judge. In addition your package must make sense, must be professionally done, and contain sufficient proof to back up your need for funds. For example, a lender will not review an entire package if your Executive Summary of the project is vague. Therefore, an experienced consultant should ask you for a detailed list of documents that you should be prepared to provide.
Idea #8 — Don’t work with more than one consultant at a time. Speak with a few, find out what they’re made of and what they can do for you, but in the end you’ll want to narrow it down to one. You will certainly benefit in long-term by building a strong business relationship with someone who is not in for a quick buck. The relationship is a two-way street, just as you expect respect from your consultant your consultant will expect the same from you. And don’t forget, the one that has a higher chance to get your loan closed is not necessarily the one that tells you what you want to hear. I lost a good number of deals because I just spoke in realistic terms. It’s better to over-estimate than to under-estimate. And from a consumer’s standpoint I’d rather learn the facts upfront and evaluate them before making a decision.
The above listed ideas won’t necessarily guarantee a loan approval for your transaction. Your transaction must be viable especially during today’s harsh lending conditions. An outstanding loan consultant will most likely save you time and spare you frustration if your deal stands no chance. He will make recommendations now to help you with future potential transactions. And if your deal is fund-able he will get you one of the best loans for it. I wish you luck and prosperity and hope that my ideas will get you one step further to meeting your investment goals!