In lending terms a Daisy-Chain is a string of Loan Brokers linked to each other during the process of a loan transaction. The event ultimately leads to the formation of a chain that starts from the Borrower’s direct Broker and ends with the funding source. This scenario is typical for commercial loans and more rare in the residential sector. It is also more predominant in the Hard Money arena. In just a few moments you’ll understand why. But first let’s get a better understanding of how a Daisy-Chain is formed.
For example, let’s say you’ve contacted your loan consultant (Daisy 1) to secure financing for the purchase of a distressed commercial property. Because you read my previous post you now know that your deal stands a better chance for financing via a Hard Money loan. Your consultant contacts his Hard Money lender but your loan doesn’t match their appetite. Your consultant then may end up talking to another consultant (Daisy 2) that claims he can help. Daisy 2 may have no clue about how to put a loan together but he has good contacts and he’s a good salesman. He talks to his buddy (Daisy 3) but not before he’s worked up his fee. Daisy 3 happens to have a lender for your deal, which ends up being your potential funding source. Note that sometimes, the lender may have the ability to directly fund certain types of loans but may not have the ability to fund your specific scenario at which point the lender may act as a broker by assigning your package to the ultimate lender. In this case, he may actually end up being Daisy 4.
Whether it’s two, three or more intermediaries all of them will think they’re entitled to compensation. And because Hard Money loans are known for being more expensive due to a transaction’s inability to qualify for a conforming loan, you may not know there are more individuals involved in your loan application. In many cases the excessive fees associated with such an event end up breaking the entire transaction. But even if all the intermediaries agree to lower their share one the biggest problems is that they prevent the final broker in the chain (the one with the viable funding source) from having direct access to you, the borrower. And that’s another deal killer. Lenders don’t want to deal with someone who has to go through a chain of events to get information on a loan.
A Daisy Chain does not necessarily have to be an unscrupulous event and there are two primary requisites. A smart consultant will make sure that he has direct access to the borrower and lender. Secondly, he’ll insure that the fees are not excessive and the borrower does not have to pay extra fees. If any of the requirements does not exist your transaction may end up being part of a less than desirable Daisy-Chains. Ultimately, to be safe, you may want to address your concern directly with your loan professional. Don’t be afraid to ask if he has direct relationships with lenders that fund their own money. Sooner or later you’ll find out if he’s telling the truth.