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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2017

Financing Fundamentals

Mastering these basics can help you close more loans

Financing Fundamentals

If you can’t secure capital, you can’t succeed as a commercial mortgage broker — end of story. Pitching a deal to a lender is your “rubber meets the road” moment. If the lender says “yes,” you’re in business, but if the answer is “no,” you’re not.

Here are some real-world perspectives to consider, including two variables that need to be in the broker’s favor in order to hear “yes” and close deals — not just one deal, but enough deals to thrive.

To continually boost commissions, there are two relatively simple keys for a mortgage broker:

  • A hot market. There needs to be enough activity in your market to sustain a thriving business. Many dynamics go into this, and some are more important for evaluating your market.
  • A good relationship with quality lenders. A good relationship is your direct line to capital. It won’t ensure you close every deal, but it increases your chances and ensures someone picks up the phone when you call.

This advice may sound very fundamental. That’s on purpose. It’s shocking how many commercial mortgage brokers approach lenders without putting these fundamentals into practice. If you follow the fundamentals, you will immediately stand out from the crowd, even in a very seasoned market.

Recognize a hot market

You might be the best mortgage broker in the world, but if your market does not have enough activity, you cannot thrive. So, the first factor you should look at when evaluating a market, or potential market, is size. Your city, metro area or region must be big enough to generate a lot of commercial-financing activity.

To continually succeed, financing deals also have to be of sufficient size to give you a big enough cut. So, the second factor also is simple: prices. The higher the market’s property prices, the better, although there are limits to that guideline.

High prices are not enough. Property investors not only want to see that prices are high, they also want to see they’re going up. So, price velocity is the third factor to look for. You want to find a market where prices are both high and increasing.

There is subtlety here. Prices do not exist in a vacuum. Someone must pay them and as prices increase, they will eventually hit a point where properties are no longer affordable for the market’s population. San Francisco and New York City have very wealthy populations and very high prices, but they have passed the point of affordability. Find a market where prices have not hit this inflection point yet, meaning they exhibit a fourth factor — affordability. Your market’s population needs to be able to afford its prices.

You might be the best mortgage broker in the world, but if your market does not have enough activity, you cannot thrive. 

Finally, there is a qualitative factor that makes a market hot — vibrancy. There’s no hard metric for vibrancy, but there are bread crumbs that point to it. For example, if there’s positive news coming out of the city or metro area, if gentrification is occurring, and if people are excited to live there — and many more people are excited to move there — then you can safely say your market is vibrant.

These are not the only important market factors. But they are fundamental to a broker’s success, so look for them in every market you are considering working within. If your market does not exhibit these qualities, you will struggle to find enough deals to prosper. Even in a market with these qualities, success is not guaranteed, however. You still need to tap into the many great deals that are occurring. And the easiest way to do that is through the second major key: lender relationships.

Develop strong relationships

To thrive in a market, you need access to funds. Most lenders have a number of commercial mortgage brokers they are fond of, whom they close a lot of deals with and that have a direct line to the lender’s capital. A lender will consider every deal that one of their favorite brokers brings to them.

Lenders also receive deals from brokers whom they have never partnered with, and many of these brokers are people the lender will likely never do a deal with. What’s the difference between a deal-worthy broker and everyone else? “Everyone else” acts as tollkeepers. They send every deal they stumble upon to every lender they can find.

The best mortgage brokers add value to every deal brought to a lender. This makes them stand out. This makes lenders take their calls. And this makes lenders form long-term relationships with these brokers. There are many ways a broker can add value to their deals. First, they can show understanding of their market, including idiosyncrasies and regulatory demands.

Washington, D.C., for example, has a law known as the Tenant Opportunity to Purchase Act (TOPA). A commercial mortgage broker might have to know about TOPA when closing a deal on an apartment complex of five or more units. This law can completely change the risk profile of a deal because it allows tenants an opportunity to purchase a property before a landlord can sell it. Every market has its own unique characteristics and the more a commercial mortgage broker understands these wrinkles, the more they can help a lender navigate them.

Understand the transaction

Next, a broker can present lenders with multiple financing options. The best brokers are technically competent. They put together multiple types of deals. Lenders love to see this, so know your options and bring them to the negotiation table. In short, act like a structuring agent, not just a number taker.

The best mortgage brokers also understand their clients. They develop close relationships with borrowers. At the very least, they converse with a borrower before bringing a deal to the table. In a broader sense, the best brokers do their homework upfront. They take the time to understand a transaction. They dig into the minutiae. They expand, divide and analyze the deal. They identify and solve problems quickly.

Lenders can work with bad facts. But they can’t work with bad facts a broker does not disclose.

The exact information a broker should know and share changes from deal to deal. But the best brokers always provide relevant information on the strengths and weaknesses of the deal, as well as the borrower, to their lender.

This takes time, and the truly knowledgeable commercial mortgage brokers do not jump at closing the deal. They do not simply send deals to lenders via e-mail. First, they will get the lender on the phone. They will provide the aforementioned information. They’ll ask the lender’s opinion about the deal before officially pitching it. And when the lender asks them questions, the broker either has the answers or agrees to find the answers.

Finally, lenders love brokers who demonstrate integrity. The worst thing you can do that will ruin a deal — and the chances of developing a long-term relationship with a lender — is to hide something. Lenders can work with bad facts. But they can’t work with bad facts a mortgage broker does not disclose. If a lender puts 10 hours into a deal and finds out the borrower has a bankruptcy that wasn’t disclosed upfront, the lender will not approve the loan, and they will be unlikely to consider another deal from that broker again.

There are other ways to add value to a transaction. But these are the fundamentals. The commercial mortgage brokers who do not put these steps into practice are ones that lenders choose not to work with. But brokers who do close deals and develop long-term relationships with lenders adhere to enough of these fundamentals to stand out and instill confidence.

•  •  •

 An individual lender may be small, operate in one market and have a limited perspective. Even the smallest lending companies, however, normally can distill some universal principles that matter when it comes to working with commercial mortgage brokers. Lenders and brokers should talk to each other. By starting a conversation, both parties can increase their shared understanding of how to mutually thrive in today’s markets.


 
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  1. Posted: Dec 11, 2017  16:56 ET
    By: Marty Lefton | SV Commercial Lending
    1. 0


Very well stated. It helps when the Mortgage Broker can be the first line of Underwriting the deal. And, I agree that relationships matter greatly. Taking this approach not only allows the Mortgage Broker to fund deals efficiently, but it also allows Bankers to utilize the Mortgage Broker to solve problems and thus insulate their own clients.

Marty Lefton

SV Commercial Lending

mlefton@svcommlending.com

408-669-4319


 

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