As published in Scotsman Guide's Commercial Edition, October 2005.
Unfortunately, not all commercial loans close. It is mind-boggling how many deals lenders see that have no chance of ever funding.
Deals that never fund typically fall into three primary categories:
Properties that are too special-purpose (e.g., catfish farms or mining claims);
Properties in which borrowers seek 200-plus-percent financing on a purchase because they are getting a “great deal”; and
Properties in which borrowers are looking to get a loan based on best-case pro forma financials or overly optimistic appraisals.
Every broker reading Scotsman Guide sees deals that fall into one of these categories. Many new brokers, or those transitioning to commercial deals, can be mesmerized by the possibility of closing a large loan. As a result, they spend many fruitless hours trying to place these loans. Many such brokers send lenders large packets and call multiple times to discuss the “urgent” deal. But in many cases, they don’t even fully understand the deal they are trying to fund.
Let’s try to calculate the resources spent chasing these deals. Assume a broker expects to make $50 per hour (equal to about $100,000 per year). Say this broker spends eight to 10 hours on each deal. If a broker worked on 10 dead-end deals a year, it would be the equivalent of wasting about $5,000 a year. That doesn’t even include the additional costs incurred by such things as lender-evaluation fees and administrative time spent by employees.
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