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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   March 2013

Spot Large Rewards in Small Deals

Small-loan businesses thrive on the right resources, efficiency and clients

Spot Large Rewards in Small Deals

In the commercial mortgage market, the small-loan business — despite its name — is big and potentially profitable for almost everyone involved. Many multifamily-property owners looking for financing do not hold large portfolios, or are looking for small loans for specific properties. Serving these small-loan clients, therefore, can be a great business for commercial mortgage brokers who are willing to consider the specifics of their clients’ needs and to adjust their processes and resources to  accommodate them.

In making the move to work with small-loan deals, commercial mortgage brokers also may need a simple change of mindset to understand how small loans make sense. Although large deals tend to get more visibility and always have attracted many players in the lending business, there has been a growing demand for origination and servicing of small loans, which represents a real opportunity for brokers who take the business seriously.

It is also important to understand that the small-loan market is not just a smaller copy of the large-loan market. Commercial mortgage brokers and originators cannot expect to succeed by applying the same business methods and strategies that work well for large deals. Without the right processes, partners and investments in technology, mortgage brokerages that simply try to tack a small-loan business onto an existing large-loan business often end up on a tough path.

Commercial mortgage brokers who strive to establish their business in the multifamily small-loan market, therefore, should have the right focus and understanding of how this market works. Here are three points that can help you make the best choices if you’re considering working with this business niche.

1. Product selection

Commercial mortgage brokers who are making their first entry to the small-loan market should look carefully at the products they work with. When making a selection, the product should:

  • Minimize expenses, including upfront due-diligence, legal and closing costs
  • Offer the same competitive rates and terms that are available for larger players

If your client is looking for a loan that closes quickly and still offers a great rate, consider the products of government- sponsored enterprises like Fannie Mae. These products typically run on a longer term and can provide borrowers with greater stability.

2. Resources and efficiency

Success in the small-loan market hinges on the volume of deals you do. Remember, commercial mortgage brokers who do well in the small-loan business put a great deal of focus on their volume — i.e., they close a large number of deals. To achieve this goal, consider the resources necessary and allocate them in advance. Be prepared to invest significantly in human capital, technology and the relationships that are going to be vital for your success. 

In addition, efficiency in all areas of operation is essential, and it goes beyond maximizing the output of internal processes. If your strategy is to make profits through volume, the vendors you work with will have to work the same way. Your partners — engineers, appraisers, legal counsel, etc. — in the process must have their own efficiencies in place to make your small-loan investments a success.

3. Client sources

Finding the right customers is another key requirement for success. A newcomer to the small-loan market may find it extremely fragmented and difficult to penetrate, however. In most cases, property owners who are looking for small loans may manage only one or two properties at a time, and even these may require a significant amount of energy to locate initially.

"Success in the small-loan market hinges on the volume of deals you do."

Developing solid connections with local real estate brokers and banks can help with the task of finding these potential clients. Because many owners of smaller properties are served by their local banks and believe that they are their only option, stay in touch with these banks. It is not uncommon for banks or mortgage professionals to seek out help with a product that complements their own offerings. These connections help local banks retain quality customer relations by offering the most favorable loans possible, and they also help you find small-loan borrowers. 

• • •

The small-loan multifamily market offers great business opportunities, but it comes with a myriad of challenges. Even though the U.S. economy continues to see a small, tenuous recovery, it is important to remember that jumping in without preparation and sufficient capital may lead to failure. To best serve your own business and your customers, keep in mind that this particular market requires substantial investment, and it is not without upfront costs. It can, however, be a great addition to your company if done correctly.

Commercial mortgage brokers looking to expand into the small-loan business, therefore, should look for the right partners, including lenders that have invested in the business and can help them efficiently serve their customers with the best small-loan products and processes available.


 


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