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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2018

Recognize the Warning Signs

Changing times require adapting your mortgage-broker business model to avoid pitfalls

Recognize the Warning Signs

It’s an interesting time to own a business, as it seems every day brings new surprises, both good and bad. Predictability is a foregone luxury of past generations. In today’s fast-paced, tech-fueled world, business owners must remain nimble and aggressive while trying their best to anticipate the future.

These demands will continue to exist in 2018. Commercial mortgage brokers are not immune to these changing times and, if anything, are having a harder time than most small-business owners. Brokers should look to avoid some common gaffes that can unknowingly push their businesses nearer to their end.

Fortunately, the things that may be stifling or hurting your mortgage-broker business are often very simple to fix. Some of the corrections that need to be made may even seem counterintuitive.

Among the business strategies that should be employed are the following:

  • Not charging more when you’ve been making less; 
  • Spending money on advertising when finances are tight; and 
  • Giving more decisionmaking control to your clients when you have fewer of them.

At first glance, these strategies may seem to be recipes for increasing your business woes. The opposite, however, is actually the case.

Overcharging clients

Overcharging for services may seem like an obvious path to avoid, but it’s not as straightforward as it seems. With borrowers turning to the internet to find lenders — and banks loosening their lending parameters again — borrowers who need a mortgage broker’s help have become scarcer. That creates a temptation to raise prices on the remaining clients to boost revenue. The brokers and lenders that overcharge their clients, however, are fast-tracking their demise.

For mortgage brokers who follow players operating in the merchant cash advance (MCA) and alternative business-loan spaces, this trend is readily evident, as some large lenders who were in years past reporting multimillion dollar earnings have now closed their doors. This also is true of a large number of independent sales organizations (ISOs) that are no longer making a profit with costly MCA and alternative business-loan products.

The brokers and lenders that overcharge their clients, however, are fast-tracking their demise.

What is helping to precipitate problems in the MCA industry — and the theme that is starting to trickle over into the commercial mortgage-broker space — is the knee-jerk reaction of many business owners to overcharge the clients they have out of fear that there aren’t more coming behind them. It doesn’t matter who the client is or how badly they need a service. They know when they’re being overcharged or paying more than they had hoped.

Although those clients may seem grateful at loan-closing time, cognitive dissidence sets in fast, and it quickly becomes unlikely that they will work with you again. They may even turn to social media or their business network to share their distaste with your service. The answer to a dwindling client pool is not to overcharge the clients you are able to gain, but to differentiate yourself by providing excellent service at a reasonable cost and adapting your business to grow your client base.

Lack of marketing

If the previous section left you wondering how you can adapt your brokerage business to grow your client base, the answer is to market your business. This doesn’t mean you need to spend thousands of dollars you may not have on pay-per-click ads or Facebook advertising, because there are plenty of inexpensive or free ways to get your company’s name out there.

Start by deciding how big you want your market to be. Many mortgage brokers do extremely well just by sourcing business in their own community. Others feel their best bet is to build an internet presence and play on a national scale to gain clientele across state lines. There is no doubt the latter option is the more expensive one and certainly not always the best.

When you increase your market, you increase your competition and your customer-acquisition costs. If you have not already established yourself as a nationwide brokerage, now isn’t the best time to do so. It’s best to plant roots in your local community and branch out from there.

It can be very costly to acquire a customer through direct media advertising, but it’s free to create a referral relationship.

Even though many people walk around with their smartphones glued to their face, a large number of them still enjoy reading local community newspapers and magazines. A targeted advertisement in your local news publication can often cost only a few hundred dollars and will reach a comparatively large potential customer base. Additionally, sponsoring a local event also can be reasonably priced and get you great exposure. Whether it’s your child’s school event or a community fundraiser, sponsorships can get you face to face with a lot of potential borrowers.

Marketing your business doesn’t always mean buying ads or shelling out money. It can also mean reaching out to your peers to let them know that you are a commercial finance expert. Meeting with professional peers — such as attorneys, Realtors, accountants and bankers who have an existing client base — and setting up referral relationships with them is free, and it’s an extremely effective way to market your business and generate deal flow. It can be very costly to acquire a customer through direct media advertising, but it’s free to create a referral relationship.

Lack of options

Sometimes, mortgage brokers are unable to identify certain recurring themes that consistently prevent them from closing loans. Frequently — and to their own detriment — a broker will overestimate the strength of a client relationship, for example.

The broker may believe they are in complete control of the client and have been empowered to make important loan-related decisions on the client’s behalf. The broker also may choose not to present term sheets, rate quotes or feedback from lenders that may actually be in the client’s best interest, foregoing these proposals in search of an offer they feel is better or will make them more money.

During that time, the broker thinks, and may be hearing, they have the absolute loyalty of the client, but the client often gets frustrated with the lack of communication and progress, and decides to work with another broker to close the loan. Sometimes brokers fail to involve clients more in the loan process out of hubris, inexperience or ignorance, but when they do that, they almost always lose out on the deal.

If you’re not presenting your client with all loan options, offers and information you are receiving from your lenders, you are doing yourself and your client an injustice. Your clients will value your professionalism and service more if you are educating them and providing results, instead of making decisions for them and keeping them in the dark.

•  •  •

To put all this in perspective, imagine how you would run your business if you were not financially stressed and the bulk of your time was devoted to marketing and closing loans. Would you choose to overcharge your clients, skimp on advertising and micromanage your clients? Of course not.

You’d charge less, spend money on advertising and provide your clients all the information, education and documentation you could to help them make an informed loan decision. By removing these pitfalls from your business, you will ensure your success for many years to come.


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