A commercial mortgage broker needs something to stand apart. In a highly competitive lending market, it’s especially important to carve out a niche in order to grow market share.
Generally, for most brokers, a client has already called their bank and possibly even another lending source. So, what can the broker offer that is seen as a unique service? There are many options, but bridge lending can easily set you apart because it is always a high-demand product and service.
In times and markets where bridge lenders openly offer credit, traditional banks are active and other lenders — like correspondent insurance companies — are searching for yield, commercial mortgage brokers can carve out a niche for themselves in which they become well-known experts. If they are successful in that effort, they’ll receive a plethora of referrals.
Even when brokers decide to acquire such knowledge, however, they still need to find a path that ensures they are supplying some sort of unique value. Becoming an expert in arranging short-term, fast-closing bridge loans is a perfect way for a mortgage broker to stand out from the rest of the crowd.
There is always high demand for fast closings or highly specialized loans. In hot real estate markets where buyers risk losing a project if delays occur, the need to close an acquisition using a short-term bridge loan increases, which makes the broker’s work in facilitating such deals that much more important and valuable.
Know the purpose
Commercial bridge loans are generally used when permanent financing is not an option. Various factors can cause this, including low occupancy rates, poor property conditions or a lengthy closing period. Bridge loans generally last one to three years and are interest-only for the life of the loan, with a balloon payment at the end. Current interest rates for bridge loans average about 8 percent to 12 percent and these loans can close in as little as 10 days.
Most bridge lenders have a narrow focus and offer a handful of products. Specializing allows them to close quickly. Despite the benefits of concentration, it also means that a commercial mortgage broker needs to work with a large number of bridge lenders to satisfy a broad array of needs. Thus, spending time each day searching out and developing relationships with numerous bridge lenders is beneficial to both clients and brokers.
Interestingly, bridge lending often provides an opportunity for follow-up loans immediately after closing. Bridge loans have terms that are generally shorter than conventional commercial mortgages. Therefore, they need to have an exit plan or takeout strategy in place before the loan closes. Many times, a mortgage broker is already working on an exit plan ahead of the closing on the bridge loan and can project additional revenues.
If a land loan was used to complete the acquisition of a vacant parcel to build a mixed-use development, for example, there would then be a need for a niche loan, specifically a construction bridge or improvement loan. Once the project is completed — and if the developer plans to hold the asset long-term — there’s a follow-up opportunity for a stabilized permanent loan.
Niches to consider
Many types of projects are a good fit with bridge-to-permanent financing scenarios. Here are three broad categories of commercial real estate in which bridge loans can be successful.
Value-add. Loans on value-add properties are generally for rehab, improvement and repositioning purposes, and are a great area to focus on. Take, for example, the acquisition of a warehouse with some small improvement funds set aside. A full teardown may not be required, but interior or structural improvements, or even a rehab budget, could be needed. The property could then be repositioned and leased so it is financially stable. Once the asset stabilizes, cash flow for a takeout loan can be established.
Another example of a value-add project is an underperforming 50-unit apartment building with retail businesses on the first floor. The property has vacancy issues in both the multifamily and retail spaces, making the income and debt-service ratio undesirable for traditional lenders. An investor is purchasing the property for $5 million with a plan to increase occupancy and improve both the apartment units and retail space. The improvement budget is $1 million, for a total project cost of $6 million. A bridge loan with a 65 percent loan-to-value (LTV) ratio would be issued for 12 to 24 months. Once the project is completed, it may have an after-repair value of $8 million. At this stage, there would be an opportunity to refinance into a stabilized permanent mortgage.
Land. Land loans are usually harder to complete because of the high-equity and low-leverage requirements. They are generally used to assemble property that will contribute to a development project. Despite their difficulties, they’re an integral part of development finance. In arranging land loans, commercial mortgage brokers also set themselves up to negotiate the construction and takeout financing going forward.
An example of a land transaction might entail assembling acreage for a condominium project. That effort might involve, for example, purchasing three separate parcels for a total of $5 million, with construction groundbreaking planned after the land acquisition. Financing could generally come from an 18- to 24-month bridge loan, with a loan-to-value ratio of 50 percent to 60 percent and an interest rate of between 10 percent and 14 percent. Again, closing a land loan provides a broker a future opportunity to compete for a construction loan.
Construction. These loans are difficult to do, but are always in high demand, with most having a duration of one to three years. If the plan is to hold the property once construction has finished, there is an opportunity for a stabilized follow-up loan, given most construction lenders don’t want to hold mortgages past the construction term.
Grow your business
Learning as much as possible about different loan niches is absolutely imperative to a commercial mortgage broker’s success. Working well with people is just as important.
Understanding how to get complicated transactions done, and being able to communicate your process to your clients and referral sources, is critical to building credibility. This will help your brand and reputation grow. As importantly, it will allow you to close more loans and market more deals.
Many lenders offer webinars, and have information sheets and other resources. These are great tools to have. Most good account executives or fund managers will take time to set up a call with a broker and their team to not only address the lending focus, but also how to go about getting deals done.
Finding white papers and trade articles, or talking to people who have participated in similar transactions, will help grow a broker’s knowledge base exponentially. The value received from a repeat customer cannot be understated.
Use your connections
Leveraging past performance is a must. Once you’ve gained the reputation of being able to solve a certain type of problem, people will remember and return.
Having a reputation for being able to close a deal quickly when there is an expiring purchase contract or a missed loan deadline will always set your business apart from the competition. Always look ahead and remember there are usually follow-up loan opportunities that become apparent from the onset of the initial bridge loan.
One critical component to growing a niche brokerage business is to educate and market to existing contacts and referral networks. Most people in real estate understand that many projects happen at the 11th hour. Becoming the go-to person to solve a problem can create a lucrative pipeline of business for any commercial mortgage broker. Expanding niche offerings and finding complementary subsections will add to the bottom line of any broker.
Verifying a lender’s ability to close is critical. There’s no worse feeling than being days away from closing, only to find out your lender cannot perform. Confirm that a bridge lender has committed capital, the availability to fund the loan and is actively lending in the niche you’re marketing to.
Another component for building strong lender relationships is that you never know where leads will come from. Most bridge lenders want to see their clients be successful. It’s not uncommon for a mortgage broker to get a referral directly from a bridge lender that needs help moving a loan off its books.
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The biggest part of finding your niche is going out and doing it. Some mortgage brokers may be scared of moving into a new arena, but carving out a specialty service in your market and establishing yourself as a subject-matter expert will always pay dividends.