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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2014

Know When to Go Back to the Drawing Board

Top mortgage professionals find a way to close tough loans, even against the odds

Commercial mortgage professionals have all faced this dilemma: When do you give up on clients who are less-than-forthcoming about the facts of their financials? At what point are you willing to let all the work you’ve invested in a transaction go for naught?

In comparison to its frequently less time-consuming cousin, the residential mortgage, a commercial mortgage is often labor-intensive, not only because of property analysis, but also because of the seemingly insurmountable number of slings and arrows encountered along the way, from issues related to debt-service-coverage ratios to misfiling of corporate entities.

Closing a commercial loan often seems like an endless procession of going back to the drawing board to figure things out. So, the overall cost of giving up on a deal because a client has withheld damaging financial information is much greater than the broker’s lost payday.

A common problem

Commercial mortgage professionals often enter a transaction full of optimism, especially for transactions from clients who have been sidelined too long by the lingering recession. These clients need their hands held through the process a bit more than it is normally necessary, but we happily oblige because we understand their misgivings in the wake of one of our country’s worst economic setbacks — and we know our efforts will have been worth it when the loan closes.

So, as a transaction progresses, we proceed with underwriting the file, ordering the third-party reports and overcoming any underwriting hurdles. But sometimes at the most inopportune moments during underwriting, we find all of the client’s skeletons popping out of the closet: The unpaid tax lien from five years earlier, the ex-spouse who was just foreclosed on with your borrower’s name still on the loan and the list goes on. Any one of these factors may tank even the best of deals, ones that are within striking distance of a closing, not to mention you collecting your paycheck.

Unlike many industries, our compensation is predicated exclusively on end performance. We may provide the most exemplary standards of care and performance in our work, only to have our commission vanish right before our eyes on the eve of a closing.

An uncommon solution

As a mortgage professional, you base your loan package and presentation on information provided by borrowers and trust that they are providing all of the relevant facts necessary to close their loans. There is little or nothing you can do about the client who is not entirely forthcoming, but by using your own knowledge and professional acumen, a seemingly dead-in-the-water transaction may be salvaged.

Take, for example, the following scenario. A client has gone through months of negotiations with an existing lender for a discounted payoff and has insisted on handling it alone, but to no avail. After several requests to let the broker take care of it to expedite the closing, the client finally relents, resulting in the negotiation of a significant principal reduction.

The transaction is within inches of closing when the client informs the broker that the available cash has been cut by 50 percent to pay off the difference to the existing lender that was ready to foreclose. There are no other available funds.

By this point in the deal, there have been countless misrepresentations by the client, and everyone else involved — from the new lender to the title company — is probably ready to throw in the proverbial towel. The client only has a specific amount of funds to shore up the difference and is seemingly miles away from what the existing lender requires.

The brokers who make it
work go back to the drawing
board and figure it out.

The broker realizes, however, that relative to the overall loan amount, the difference is in the hundreds of thousands of dollars, not millions, and there is a way out. The broker proposes that the new lender raise the loan amount, which is already above the maximum loan to value, and charge a bit more in lender points so that the transaction can close. After much negotiation, the lender relents and agrees to the higher loan amount to close the loan.

Tough deals are worth it

In such cases, you have two choices: One, do something that results in the paycheck in which you have invested months in the making, or two, do nothing and get nothing for your considerable efforts. A savvy professional makes the first choice. Over the years, the loans you will learn the most from and where you will have the highest return on investment are the tough ones.

These are the loans that keep you up at night crunching numbers and doing add-backs to the point where you include every penny possible to make the opportunity work. And these are the deals that count because they can make or break your reputation as a broker. Would you rather be known as the person who made a deal work, or the one who walked away from it?

The brokers who make it work go back to the drawing board and figure it out. They do things like ask for another personal financial statement and an updated bank statement, and find out if there are any further funds refundable out of the escrow account to close the loan.

Since the economy has forced our industry into more of a “time is of the essence” mode, we no longer have the luxury of bankers’ hours or long lunches. We have clients who are facing overwhelming financial burdens and payoff timelines that require precise funding to be executed on their behalf, often when they are in precarious circumstances that require bridge loans and hard money.

Another example illustrates the importance of creative, timely solutions. In this particular case, the borrower is using a management company that has been less-than-faithful to the IRS, owing not only back property taxes but also payroll taxes, the “Holy Grail of no-no’s” in a lender’s eyes. Many lenders would decline a loan like this and move on to the next borrower, and in this case, all but one has turned it down.

Against these odds, however, the broker steps in to salvage the deal by explaining in detail to the one lender that will listen what the prior management company had done, and was forthcoming about the new management’s excellent performance and the upside of income from two additional unoccupied buildings with strong potential cash flow after rehabilitation. As a result of this broker’s efforts, a loan is closed with the necessary cash out to not only finish the buildings’ rehab, but also increase their overall value exponentially.

•  •  •

Even when a client has misrepresented a file or has had a seemingly insurmountable circumstance that makes a transaction appear unlikely to close, don’t let that negatively influence your efforts. The rewards of going back to the drawing board to find a solution to close will go well beyond a mere “thank you” from the client — although you may not even get that. The work you do to salvage difficult transactions will ultimately grow your reputation and your business. And you will learn far more from these kinds of loans than from the easy ones. Going back to the drawing board is not the end of any deal, but the beginning of a new chapter in your career. 


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