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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2005

Welcome to the Neighborhood

Demand is growing for apartment lending, a largely untapped market

A few years ago, low rates, flexible products and favorable market conditions made it a great time to be a broker. Now that the phone isn’t ringing off the hook like before, many brokers are looking for the next big mortgage opportunity to offer their customers.

Now is the time to start thinking about apartment lending. It is on the rise and brimming with potential for brokers. For the most part, it is still an untapped target market. Apartment equity lines of credit are in demand, particularly because there's a scarcity of lenders and brokers that can bring them to the table.

What's the one thing that apartment owners always need? Easy access to their equity. Savvy brokers are starting to notice. Not only could apartment lines of credit offer a consistent influx of loans during the apartment-lending boom, but they also might offer an exceptional opportunity for brokers to build their brand equity by becoming their customers' expert in these products. By partnering with the right lender, brokers gain a competitive advantage and raise their brand share by positioning themselves as the indispensable resource that their customers need to do business."

Shopping for opportunities

Apartment lines of credit, particularly stand-alone products, are hard to find because many lenders believe they’re too risky. When looking at worst-case default scenarios, mortgage-product analysts see lines of credit as having the highest probability of loss. If borrowers can’t repay the first loan, they’re certainly not going to repay the second.

But many lenders might not consider all of these products’ possibilities, particularly with investment properties. The demand is there: Market-conscious brokers are looking to tap into this opportunity by finding the right lender that can fund an apartment line of credit quickly and painlessly.

Why not just do a refi and forget the search for a good lender? In the past few years, rates have been at an all-time low. If things went well, you were able to help your customers secure a great rate, and they’ve been happy with their low monthly payments. But now rates are creeping up, and it can make more sense to keep that locked-in rate rather than refinancing into a new, potentially higher rate.

Another concern is the prepayment penalty. If customers only have been in the loan for a year or two, they may not be eligible for a refi without paying big bucks.

That brings us back to the stand-alone line of credit. This is where dedicated brokers need to do a little homework. Not all lenders look alike. Some make it difficult for borrowers to qualify for a stand-alone line of credit and even more difficult to access their equity.

When considering lenders, here are the top features to seek:

  • Fast turnarounds and local decisions. These features go hand in hand. If you’re sending a loan application four states away for processing, you’re not going to get the responsive answers that your borrowers need. If they’re looking to use their equity to buy another property — particularly if they’re doing a 1031 exchange — they will want to access their equity quickly. Look for a lender with local underwriting decisions that can make it happen in 20 business days or less.
  • Flexible features. Most businesses don’t know how much equity they’re going to need until they need it. Lines of credit allow customers to draw the equity, repay it and redraw it again when they need it. Customer-centric lenders understand the importance of a flexible line and offer the right combination of features. The most-attractive products combine affordability and flexibility, such as interest-only options or prepayment penalty-free options.
  • Convenient access. If a lender can’t offer online access, forget it. Most businesses are transitioning to online financial management. If lenders can’t keep up with that, it is not going to be a good match. Brokers should seek a lender that offers multiple methods for investors to access their equity, including online banking, phone banking and convenience checks.

Once you’ve found a lender that offers the right combination of features for your customers, you’re halfway there. If you really want to boost your business, you need to start with your brand.

Building your brand

A brand is much more than a logo or a tagline. It’s the comprehensive perception of your company and your business. To achieve your short-term and long-term goals, you must differentiate yourself from the competition. Don’t just offer products; offer solutions. The primary rule of Marketing 101 is to match an offer to a need, and it works with customer-retention and acquisition strategies. First, you need to identify your target audience and its needs.

If you’re looking for ways to retain your existing customers and remind them that you’re here to serve, look through your files to see what apartment loans you’ve funded in the past two to five years. If you’ve primarily focused on owner-occupied or vacation properties, look at their files anyway. Some of them might have investment properties listed in their assets. You may not have helped them land those deals, but that doesn’t mean you can’t help them get an apartment line of credit.

Farming for prospects is another tactic you might want to try. The key to farming is to narrow down your search criteria as much as possible to find exactly the right type of customer that will fit the profile. Lists are always available for purchase from title, insurance or market-research companies that can help you search for customers who perhaps purchased a apartment building with more than five units in the past two to five years. The more information you can get, the better.

Unless your message is compelling, you can kiss your campaign goodbye. Part of your job as the expert on apartment lines of credit is to anticipate and meet your customers’ needs with solutions for their business. Start with the top three reasons to get a line of credit.

  • Reason No. 1: Make renovations and repairs on the property. Is your investor looking to upgrade the property? Sometimes all it takes is some paint, some crown molding and a few small repairs or amenity additions to turn a B-grade property into an A-grade property. Whether they’re looking to get the property ready to sell or just to increase revenues, the best way to justifiably raise rents is to make apartment improvements. An apartment line of credit makes it easy to tap into existing equity.
  • Reason No. 2: Free up cash flow. Property taxes hurt your customers’ cash flow. If your customers are in the middle of improvements or another property purchase and need some extra cash, a line of credit could be just the thing they need. The interest-only feature is particularly beneficial in this scenario, as the tax deductibility makes it even easier on cash-strapped borrowers. Of course, you should be sure to point out that discussions about tax deductions are best left between your borrowers and their tax advisers.
  • Reason No. 3: Purchase another investment property. The apartment-lending industry is booming right now, spurring many investors to expand their real estate portfolio. If your customer already is interested in another building but unsure where to get funds for the down payment, leveraging equity to build more equity can be a wise investment. Choosing a full-service lender that also offers assistance with 1031 exchanges is a good idea.

Be sure that you’re targeting the right customers with the right reasons. By demonstrating how well you understand their business needs, you’ll be proving yourself as a worthy contributor to their real estate portfolio. The name of the game is relationships. You’re looking to deepen your relationship with your existing customers to ensure that you have a steady stream of business coming your way now and in the future.

Apartment lines of credit probably will not be your bread and butter. But if they’re what your customers are craving, it’s in your best interest to be the broker that serves all borrowers. If you can give them solutions, not just loans, they’ll remember you for their next loan, their colleagues’ next loan and so on. With each successful equity loan, you’re building your brand equity in your customers’ minds.


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