You’re in the market to purchase your first commercial property. You learned all the theory there is to learn about cap rates, cash flow, operating expenses, locating property, working with real estate brokers, finding property managers, and so on. Now, you’re ready to dive in and make it happen but you’re still missing one more piece of the puzzle. The piece is important enough for you to know that you can’t do without. It’s called financing, the real estate loan securing the property you’re going to buy.
To qualify for a loan it takes a sound project and a solid applicant borrower(s). It means you or your group must be financially sound and your property must make sense to the lender. I’ve written several articles before on how to qualify a project and a borrower, and will continue to write on the topic but for now I want to focus on the person you choose to work with to help you secure financing for your deal(s).
During the real estate boom lenders competed for clients. Back then borrowers got accustomed to a plethora of commercial loan products, credit was accessible to almost everyone, and lending guidelines set with limited documentation. During the past few years the roles have been reversed. Which means that today the clients are the ones competing for money, credit is accessible to a limited number of projects and borrowers, and lending guidelines require more than just limited information.
That’s why working with a loan broker may be a good idea, and not just a mortgage broker but one that will fit your needs. For that you may want to be selective during the process. In sporting events not everyone who’s in the game makes it to the finals. The same rules apply to the world of commercial loans brokers. Not everyone you’ll meet will be guaranteed to be a good fit for you.
Following are my thoughts on why a good mortgage broker is one you’d want to partner with. These thoughts are specifically aimed at commercial real estate transactions but they easily apply to the residential ones, as well.
Mortgage Brokers, the gate keepers to the kingdom
The kingdom I’m referring to is comprised of a limited viable financing sources. A seasoned broker has the experience of affiliation and closing deals with these institutions, that’s why good brokers are often seen as the gate keepers to the kingdom. 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 quickly 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.
A good broker will first ask you details about you and your deal. She’ll let you know if your transaction is feasible. She’ll know what lender has an appetite for your particular transaction and she’ll know how to present a loan package worthy of the lender’s time. Unlike a banker, you’ll find a dedicated mortgage broker working after hours and week-ends. Bankers earn guaranteed salaries plus commission compensation. Brokers don’t make a paycheck until their clients’ loans close. If they don’t close loans they can’t stay in business.
On the subject of documentation, be prepared to provide a lot of it. If you’re not, believe me, other borrowers will. Lenders respond to well documented packages. Think of your consultant as your attorney preparing your file to prove your case in front of the judge. Your package must make sense, must be professionally prepared, and must 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 will ask you for a detailed list of documents that you should be prepared to provide.
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.
Evaluating your relationship with your mortgage consultant
The foundation of any strong relationship is good communication. During the process of developing a business relationship pay attention to the little details. Does he listen or does he talk all the time? 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. Use your instincts, if something seems too good to be true, it usually ends up being that way. 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.
In exchange, your mortgage broker will expect you to be upfront with her. Expect lots of questions and be prepared to provide answers. Answer her questions honestly and disclose all facts, both positive and especially the negative, about you and your deal. If a lender declined your loan tell her this and 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. I can’t emphasize enough how important is to have open communication with your mortgage professional.
Is more better than one?
I’m not implying you should commit to the first mortgage broker you talk to. But when you found the one that you like the most I recommend you 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’s been in business for a while and 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. A seasoned investor/borrower already knows this but a rookie has yet to learn what’s realistic and what’s not in the complex world of real estate financing.
Are you the ideal borrower for your mortgage broker?
Partnering with a competent mortgage broker is every borrower’s wish. Working with a ready, able, and willing borrower is every competent mortgage broker’s wish. For a successful relationship to develop the concept of give and take is rather important. Just as you’d expect everyone else to be considerate with your time and efforts, when you find a good mortgage professional you must be considerate of her time and efforts. A good mortgage broker is prepared to give a lot. This means time and energy to convey knowledge to you and to earn your trust. Remember however that this is a two way street and eventually she will expect a transaction from you. It can be either your own real estate purchase or a referral.
One quick way to lose the relationship with a mortgage broker is to present a few consecutive deals and expect unrealistic financing terms, like high LTV’s on marginal deals, for example. Another quick way to severe that relationship is sending your deal for evaluation and then become passive. When you start the process be sure you are ready to move forward. The information you get today may change next month, quoted rates rates could go up or lending criteria may change. At the same time lenders don’t wait for those who are not ready or are not prepared. In times when there’s competition for money lenders are efficient when reviewing packages from active borrowers.
Keep in mind that a good broker will 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 when borrowers are not fully committed. Good brokers place outstanding value on the limited sources of funding therefore they won’t be willing to put their relationship with the lender in jeopardy.
In short, don’t abuse your relationship with your mortgage broker. Treat him with respect while you expect respect from him. Read the information he sends to you. Make it a conscious effort to learn from your communication with him and from outside sources. Know that your mortgage broker is there to facilitate your need for financing, he’s not God. He can’t perform miracles but if your deal is viable, he’ll make your life easier. For that, he needs your full cooperation and dedication.
An outstanding loan consultant will most likely save you time and spare you frustration. If your deal stands no chance she will make recommendations to help you for the future. If your deal is fund-able she will find financing to fit your project. A wise person will almost always realize who he’s dealing with. When you find the right person be sure you do your best to preserve the relationship. If you do, chances are it’ll be there to serve your financing needs for a long time.