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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2016

It’s a Wild Ride to Lenders

Knowing the landscape can help you guide clients to the best deals

It’s a Wild Ride to Lenders

Borrowers new to the world of hard money or other nonbank financing fear they’ll be trapped in a jungle of high rates and predatory fees. Good mortgage originators smooth the process and calm the jitters.

The term “hard money” gets used a lot and to describe all types of lenders. If you’re not a bank or conventional lender, you must be hard money. Well, that’s just not the case.

The landscape of nonbank lenders includes a variety of categories. There are the typical hard money lenders — private, fund-backed and institutional — but there also is a group of lenders that exists somewhere between the banks and hard money funders. Your clients rely on you, as their broker, to understand the different types of lenders and the differences in the programs they offer, and to match the best product with their needs. This is what brokers get paid for and why they bring such value to the market. It also is why successful brokers have many relationships, both in the conventional marketplace and the nontraditional market.

Hard money covers a lot of territory. Strong brokers know how to navigate through this and how to select lenders they can count on. Some lenders are purely equity-based. Others want a second exit, beyond the loan’s collateral. Some lenders offer deals with expensive front-end points and high rates, others offer low initial costs and exit fees. Most hard money deals are short-term, but not all. The better you can navigate all of this, the more likely you will be to find your client a lender that can deliver.

Calming your client

When your clients hear “no” from a bank, they instantly feel lost. They become worried about losing an opportunity that may never reappear, not to mention fearful of losing their business or property. When your clients become anxious, it’s up to you to guide them through the process and make them and their professional advisers comfortable.

A bank turndown may or may not mean that a short-term hard money deal is the right answer. You need to know that there are softer approaches to hard money that often turn out to be a better solution. It’s all about borrowers’ needs and lenders’ capabilities. When a borrower must close a deal in days, tradi- tional hard money is the way to go. If you have a 30-day window, far more opportunities exist.

It also comes down to relationships. If you are bringing repeat business to a lender, there’s a better chance that the lender will go all-out to get the deal done for you and your client. Relationships go both ways, so don’t hesitate to push. If you deliver quality repeat business, a lender is far more likely to bend a bit for you — to drop the rate a little, to rush a deal through. But it won’t happen if you don’t ask.

Seasoned lenders that survived the recession are more likely

to understand the challenges of self-employed borrowers.

When trying to match your borrower to the right lender, you need to understand the different types of hard money loans available. Typically, the loans are short-term — one to three years — and expensive. They are a great lending mechanism for a borrower with an immediate opportunity, or one who just needs to bridge a gap. These loans are equity-based and rarely require much discussion about your client’s credit score. In exchange for paying the high cost of these loans, the borrower gets the money quickly and can take advantage of opportunities in a matter of days.

A short-term hard money deal is best for borrowers that need cash to complete a contract or are buying property to flip, because such projects come with an end date, a timeline that can be matched to a loan’s maturity. But if your borrower’s needs are not short-term, you may need to find a softer solution. Don’t fund a long-term need like capital improvements with a short-term loan, for instance — it’s a mismatch.

Finding alternatives

There are a handful of lenders with terms that are harder than a bank but are still a great alternative for those in the small-business community seeking commercial mortgages. Self-employed clients have more alternatives within the hard money arena than you might realize, and clients that are recovering from credit problems can still be matched with lenders that offer long-term funding. As your clients’ advocate, it is your responsibility to find them the best match.

With the Web-based tools available to you, this is easy. Use the industry tools on the Internet to match needs with lenders. Don’t let verifiable income, self- employment or a damaged credit score immediately push you to a short-term answer. You can and should submit your client’s loan to a few lenders. See what offers you get, and help your borrower select the best solution. By shopping around, you will be able to screen lenders in order to find one that fits.

Make sure you work with verified and experienced lenders that understand credit that is not perfect. Seasoned lenders that survived the recession are more likely to understand the challenges of self-employed borrowers. You don’t want to deal with the new guy on the block unless you’re willing to risk delays or last-minute rule changes. Look for a lender that will listen to your borrower’s credit story, one that will place weight on the other “C’s” of credit: character and collateral.

Over time, you will get to know these players and create relationships with them. You will know who delivers on their quotes and what the turnaround time is. Watch for pitfalls. Don’t commit your client to paying a lot of upfront fees until you have a commitment. Know the perils of a letter of intent and understand that it is not a commitment. The right lender is one that provides answers, not just questions.

You also will want to understand what your lenders do with their loans. Do they sell them or do they retain them and stand by their customers? Look for lenders that, regardless of what part of the secondary or hard money arena they are in, service their own loans. If your lender services, and even better, owns the loans, you know they will be there throughout the transaction and for any future transactions.

Helping your client make smart decisions is the best way to generate good word-of-mouth. A happy client means you’ve done your job well and have a high probability of repeat business  and referrals. 


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