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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2005

Betting on High Odds

Deciding which deals to work on doesn’t have to be such a gamble

c_2005-11_Mardesich_spotI got an interesting call recently from a full-time commercial mortgage broker. He told me he had more deals than he could handle.

“I have 300 deals in my pipeline all the time,” he said.

“That’s great!” I responded. “How many loans do you close each month?”

“Most months I don’t close any,” he said. “I’ve been full-time in the business for a year and a half, and I’ve closed three deals so far.”

I asked if they were large deals with sizeable fees.

“Yes,” he replied, “I’ve made about $40,000 between the three of them.”

This guy was working 10-hour days and running himself ragged, and he made only $40,000 in a year and a half. I asked him what kinds of deals he was working.

He had every kind of deal you can imagine — from gas stations to golf courses, from power plants to marinas. He didn’t have the willpower (or perhaps the wisdom) to say no to anybody who came to him looking for a loan. To him, every deal was potential income. Why would he turn anything away?

And so this broker fell for the classic booby trap in the commercial-loan business: spending all his time working on low-odds deals. The way out of the trap, obviously, is to strategically spend more time working on high-odds deals.

The deals to avoid

What’s a low-odds deal? Any deal that has low odds — for any reason — of closing and getting you a paycheck. Some brokers think a low-odds deal is one in which you aren’t too likely to find a lender to approve and to fund the loan. That is certainly one type of low-odds deal, but it’s not the only type. Here are just some of the low-odds deals brokers should avoid:

Deals no lender will fund. Many brokers work on any and every deal they can get their hands on. But some deals are simply not fundable. The only way to protect your valuable time is to know which deals aren’t fundable. This means knowing underwriting guidelines well. If you don’t know guidelines, you’re doomed to waste a lot of time on deals that never have a chance of closing.

I’m not talking about a casual familiarity with guidelines; I’m talking about serious familiarity with intricate details. This level of knowledge comes from day-in, day-out involvement with lenders, borrowers and deals.

It’s impossible, however, to have this type of understanding unless you narrow the range of deals you consider. Otherwise, there are simply too many programs, lenders and property types to know.

Deals your lenders will fund, but at uncompetitive rates and terms. The reason many deals don’t close is not because lenders won’t fund them, but because borrowers won’t accept them. Finding a lender to fund a deal is only half the battle. The other half is enticing the borrower to go through with it. Offering superior terms is the only way to avoid having a lot of borrowers leave you at the altar.

I used to work on a lot of owner-user commercial-loan transactions. I submitted these loans to U.S. Small Business Association (SBA) lenders, the undisputed rulers of the owner-user commercial-loan market. I managed to get many pre-approved and far along in the process, but few ever closed. At some point during the transactions, the borrowers would invariably announce they had chosen another bank to do the loan. In any given town, there are SBA-certified lenders, so it was not hard to figure out why this kept happening. At best, I was offering a product that was the same as everybody else’s. Trust me, this was a lousy way to try to make a living.

Do whatever it takes to find and stick with lenders and loan programs that allow you to offer a clear rate and terms advantage.

Deals some lenders will fund, but not the lenders with which you have a relationship. Until you have established some solid relationships with reliable lenders (assume nothing until you’ve closed a few loans), you have to experiment and take some chances. But once you’ve identified your dependable lenders, you should focus the majority of your time and energy on the deals these lenders want.

I’m not saying it’s impossible to close a deal with a lender that is new to you. I’m simply saying a first deal with any lender is a low-odds deal. I suggest focusing 80 percent of your efforts on proven lenders and programs and leave the other 20 percent for experimenting.

Deals in which the lender does not protect your fee. You invest weeks or months of effort getting a deal to the closing table. Do you really want to discover at the closing table that your commission is nonexistent? That’s what you’re setting yourself up for if you’re not protected by the lender. Some lenders don’t even make a pretense of protecting you, telling you you’re on your own for your fee.

Closing a deal in and of itself accomplishes nothing if you don’t get paid. Likewise, closing a deal and getting half the fee you’re entitled to is frustrating. If you work with lenders that don’t completely protect you, both of these scenarios can happen regularly.

Keep the odds high

So, what is a high-odds deal? Plain and simple, high-odds deals are those in which you have high odds of closing and of getting paid your full fee.

With high-odds deals, you’ve done a good job screening the borrower and property — and you’re thoroughly familiar with the lender, program and guidelines. You’ve chosen a lender that fully protects your fee. The pricing and terms you’re offering are superior to those available at local banks and other lenders. Overall, these deals simply don’t involve so many “moving parts” and/or potential landmines.

Figuring out which deals are “doable” is relatively easily. High-odds deals are the ones that will consistently make you money.


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