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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2016

The Art of Setting the Fee

Know the deal, the competition and the client to determine how much to charge

There’s a basic question that affects commercial mortgage brokers — veterans and beginners: “How much should my commercial mortgage fee be?” It’s a great question. Like most things dealing with commercial lending, the answer is, “It depends.”

First, it’s wise to pay attention to supply and demand. If it’s a competitive loan situation with a strong borrower and property, you have to look at how the rate on the program you are offering stacks up to the competition. Not that the borrower will necessarily tell you — but you need to know.

Consider, for example, a deal in which you are able to meet a borrower’s requirements: a fully amortizing, 20-year fixed rate in a deal where everyone else is only offering five or 10 years fixed — with a balloon at the end. This 20-year fixed rate at a screaming rate is a clear competitive advantage. Hardly any banks will do this.

In this case, you can be confident the borrower will not want any of the other options at all, once he or she sees your offer. If it’s a relatively small loan, 1.5 points is reasonable as a fee, and your client will probably pay it without even blinking.

Many variables

There are other ways in which you can be the only one meeting the borrower’s needs, allowing you to charge a relatively large fee. You can excel in providing the best loan amount, cash-out terms, or even  a better deal based on the borrowers’ credit rating. In some of these cases, you may be able to charge the borrower 2 or even more points.

On the other hand, you also will find yourself competing in deals that everyone wants and that everyone is willing to bend over backward to win. In such a case, you will need to be competitive with your brokerage fee, charging a fraction of a point, in the neighborhood of 0.375 percent, and also seek out lenders offering low interest rates.

Even with a low-rate, low-fee package, you still can lose out on a deal. Many brokers, for instance, have seen cases in which borrowers looking for a refinancing opted to stay with their current lender at a relatively high interest rate because the existing lender was willing to extend and modify the note without the need to go through a loan closing. Because of the ease for the borrower, including the elimination of title and closing costs, and origination fees, existing lenders may win such a deal, even if you can offer the borrower a lower interest payment over a 10-year term.

Fees are important, but they are not the only factor
your existing and prospective clients consider.

This goes to prove that borrowers are interested in much more than rates and fees — which is precisely why setting brokerage fees can be as much art as science.

Some guidelines

Supply and demand are factors in any deal, and they weigh on multiple other factors — everything from credit leniency and convenience to loan-to-value ratios and prepayment penalties, and much more. All of those factors are important in marketing your brokerage services to prospective clients. Reasonable fees are often a good selling point, but it’s best to be able to cite a track record of putting together attractive packages, and an ability to consistently complete hard-to-close deals.

Clearly fees are important, but they are not the only factor your existing and prospective clients consider. So how much should you charge? Following are some guidelines to consider:

  • Know the competition and where you stack up.
  • Know the borrower’s true hot buttons. Don’t assume rates and fees are the only drivers.
  • The customary fee for a high-quality deal between $250,000 to about $2.5 million is about 1 point — other things being equal.
  • The competition and borrower’s hot buttons can and should influence what you decide to charge, up or down from the customary fee.
  • Lenders’ fees enter into the equation as well. If you’re doing the loan through a community bank that is charging a point, it will limit how much you as the broker can charge. If you do the loan through a bank that lends at par (no fee), then you can obviously charge your fee without having to consider the lender’s fee in your decisionmaking.
  • Some commercial lenders pay a premium. This is common on U.S. Small Business Administration (SBA) loans; on larger and higher-quality multifamily loans; and on “bank turn-down” programs, such as stated-income loans. On the SBA loans, the broker’s premium is very often fixed at a certain level, and you aren’t permitted to charge origination or broker fees in addition to that premium.

In short, know the deal, know your market and know your client. Hard-to-place loans, unusual niches and deals in which your clients’ equity or credit rating are lacking all present challenges for a broker, and fees should reflect the brokers’ difficulty in overcoming those challenges.

The borrower does not care what you think you have to make. Brokers are not operating in a vacuum, but rather in a marketplace influenced by competitive forces. Being out of touch and trying to charge what you want as opposed to charging what’s right for the deal is the quickest way to lose the deal.

• • •

Bottom line: If you want to be successful as a commercial mortgage broker, you have to charge value-based fees. If you undercharge on every deal out of ignorance, you won’t make enough money to survive in this business. If you overcharge, you will kill most of your deals before they start.


 


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