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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2005

Going National

More lenders are relying on national networks of third-party vendors

Commercial lending has progressed dramatically in the past few years. Not long ago, if you wanted a loan for a smaller commercial property, such as a three-star mobile-home park or a small office building, you had to look to a local bank or to the U.S. Small Business Administration for financing. Now, national lenders that focus solely on smaller and midsize commercial and multifamily properties have created more lending options for this type of borrower. And like residential lenders, national commercial lenders often package and sell their loans.

Unlike in residential lending, however, many local appraisers, inspectors, title and closing companies are still not familiar with national commercial lenders’ requirements. Because these loans are often sold to investors, commercial lenders have specific requirements for their third-party vendors. Many local vendors are not accustomed to working with national commercial lenders, and they are sometimes unable or unwilling to comply with the necessary requirements.

Proactive lenders, however, are working to resolve this issue. In 2006, brokers can expect to see many national commercial lenders use national, third-party vendors to handle all third-party reporting — and closings. Lenders may refer to these vendors as being “in-network” and those they do not typically work with as “out-of-network.”

Overcoming challenges

This trend is occurring because of ongoing challenges often encountered by out-of-network and local third-party vendors. For example, many commercial appraisals and inspections take more than a month to complete, depending on the location and the type of property. It is difficult to get qualified appraisers to drive an hour when they have plenty of work in their own market. Thus, the turnaround time and cost can be higher.

Many national lenders also spend significant time and resources educating local third-party vendors about their specific report requirements. So when an appraisal is ordered from an appraiser that has never worked with the lender before, the lender usually requires corrections or adjustments to the report to meet requirements. This may translate to higher costs and time delays for the vendor to make corrections and for the lender to send the appraisal to a reviewer.

Some lenders are already contracting with national appraisal firms for their in-network reports. Other lenders are developing their own network of appraisers through internal appraisal departments. Another growing trend is for one outside vendor specializing in commercial real estate appraisals, title work, legal, flood certification and closing items to bundle all third-party reports and issue them to the lender. These vendors work closely with the lender to coordinate everything, from obtaining an appraisal to scheduling the closing.

Considering the benefits

There are numerous reasons for a commercial lender to make this transition:

  • It creates a centralized and streamlined ordering process. The appraisal, inspection and title services can be ordered instantly, securely and simultaneously online. Multiple calls, negotiations and orders that often delay and encumber the process should be eliminated. 
  • The lender will no longer have to issue new instructions continually. The vendor has already been trained to that lender’s specific requirements. Thus, the learning curve for each new third party is eliminated. The national company issues report orders to a network of local representatives, each of whom has received specific report requirements upfront.

Take, for example, a local title company asked to provide recorded documentation on a property. Most title companies in tertiary markets — and even some in large markets — do not have a commercial underwriter on staff. Once the title company compiles all recorded documents on the subject property, it sends documents to the national agency. There, on-staff underwriters are experienced in underwriting commitments for a commercial loan, and they understand all the endorsements and representations required of the lender.

  • Timeliness will increase. Through a contractual agreement with the national vendor, the third-party reports will be received within a specified period. Unlike a local third-party vendor that has to complete a single report, the national vendor must maintain a contractual obligation to produce a large volume of reports. If the vendor does not complete a report on time or completes it inaccurately, the company can face fines, contract termination and a significant revenue loss. The lender wields tremendous influence on the national vendor to perform in a timely fashion on each loan.
  • There will be a reduction in costs to the borrower. Because of the quantity of work completed by national in-network vendors, the lender often can negotiate a reduced cost based on work volume. In some cases, the lender can negotiate a flat rate for services, based on property type and loan size. This often occurs when the lender initially contracts with the vendor.

Through these negotiated rates and volume discounts, savings can be passed to the borrowers that are not available with one-time orders.

Making the shift

Although many real estate agents, mortgage brokers, buyers and sellers have established relationships with local third-party vendors, there are benefits to ordering these reports only through a national, third-party vendor.

Already recognizing the benefits of a national vendor network, some local appraisal firms are affiliating themselves with national networks and learning the networks’ requirements. Local vendors can supply their market expertise in the timing and format required in their national contract.

If national commercial lenders make this transition, the next year can be frustrating for some investors or agents who wish to close with a certain firm but desire the best loan terms offered. However, agents, brokers, buyers and sellers alike can proactively align themselves with this transition. They must recognize the reasons for this move and the benefits of using in-network third-party vendors: a smoother, more streamlined loan process; faster closings; and reduced costs overall. These result in a win-win situation for all parties.


 


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