Niche loan products and services are the key to any successful marketing campaign. They enable commercial mortgage brokers to establish new referral sources that otherwise may not have been responsive.
Niche products are a conversation starter. They set you apart from the competition. They allow mortgage brokers and lenders to say “yes” to deals more often. And they enhance your revenue stream.
Commercial real estate agents are often deluged by originators who peddle flyers offering loan programs and services that usually have no discernible difference from each other. In addition, many Realtors have long-standing relationships with mortgage brokers who they feel comfortable with, so over-coming their reluctance to establishing a new relationship can be hard to accomplish.
This is where an introduction to your niche products can come in handy. The same Realtors, as a result of their hesitancy, may be oblivious to the opportunities afforded by niche products.
Realtors may find it difficult to resist an originator who asks about their deals that could not get done, to see if there was a loan program available that could accommodate the transaction and earn the Realtor a commission. It is better (and easier) to set up a meeting with a new referral source by asking them to discuss the deals they lost rather than walking in with doughnuts and a rate sheet.
Regardless of the space in which you originate commercial mortgages, there is probably a niche product (or products) that can enhance your matrix and help you close more loans. Some mortgage brokers are fearful of establishing new relationships with lenders that offer niche products, given they have no prior experience with them. Certainly, that can be a cause for concern as you do not want to jeopardize a referral source or client. There are no rewards, however, for those who do not take risks.
The majority of lenders that offer niche programs are well-established in the marketplace. In addition, niche products afford you options for deals that may not qualify for conventional loans because of a multitude of factors. This is not to say that niche programs are offered only by nonbank lenders. If you primarily originate multifamily loans, for example, there are conventional lenders that do not require a borrower’s tax returns or historical income and expenses.
Some transactions through the government-sponsored enterprises Fannie Mae and Freddie Mac also do not require tax returns from the guarantor. Some conventional lenders will allow you to close on a vacant property using market rents to qualify. Other lenders will work with borrowers who have, for example, an outstanding violation from a city’s environmental control board or department of buildings, or those with FICO scores as low as 620.
Depending on how aggressive you want to be in offering niche programs, you can find loans with low minimum debt-service-coverage ratio requirements; “low FICO” products for borrowers with credit scores below 500; stated-income and no-ratio loans that reduce or eliminate income-verification requirements; and even owner-occupied commercial real estate transactions that rely mainly on a business’ profit and loss statements.
All of the above are examples of niche loans, and the ability to accommodate transactions that happen to meet any or all of these factors equates to more closed loans. Although a lender or mortgage broker may receive many referrals from conventional sources, they often close more loans when there are obstacles to conventional financing, and they are able to provide viable solutions. That is the main benefit of niche lending.
For the most part, the commercial real estate lending landscape has taken on a similar shape as the low-documentation Alt-A market of a decade ago within the residential mortgage space. Whether that is a good thing or a bad thing can be debated.
It is irrefutable, however, that these additional options afforded to commercial mortgage originators provide more avenues to get deals done and, as a result, open up the possibility for relationships with more referral sources and clients. It also should be noted that many of these niche products come with conventional interest rates, and those offered by nonbank lenders normally come with “soft-money” terms that are a viable and less-costly alternative to traditional hard money loans.
Unique property types
Niche lending is not limited to products, however. It also includes numerous property types that conventional lenders may not finance for any number of reasons. Properties such as gas stations, car washes and auto-repair shops, for example, may pose environmental issues that can deter conventional lenders from financing them.
The U.S. Small Business Administration will only finance certain niche property types if they are owner-occupied transactions, so there is a void to be filled by lenders willing to finance these property types as investor deals. The niche-property space has become a larger share of the commercial mortgage market, and brokers can benefit from this evolution — if they are able to line up financing terms for a sports-complex acquisition, church construction or purchase of a vacant mixed-use building, just to name a few examples.
Another potentially beneficial niche property type is medical-office financing, where you can provide for the business-purpose purchase of a condominium, co-op or single-family home while simultaneously financing the build-out or equipment acquisitions. A mortgage broker may develop a contact list filled with doctors, dentists, surgeons and veterinarians who become repeat clients or refer new clients.
Geographic location may be a determining factor for the types of niche products or properties you offer to clients. In areas where co-ops are prominent, for example, offering underlying co-op financing or bulk-share loans (in which a loan is secured by multiple co-op units owned by the same borrower or entity) can be construed as a niche product that is not offered by some conventional lenders.
For areas of the country in which condos are prevalent, you may be able to provide financing to a homeowners association (HOA) for a property purchase, or deal with “fractured condo” transactions in which multiple housing units have gone unsold and are available for a bulk purchase. Maybe you work in the Bible Belt and want to offer acquisition or construction financing of churches to enhance your share of the market with lenders that specialize in these properties.
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Any or all of these niche programs and property types may prove to be lucrative offerings that enhance your position in the marketplace. As a commercial mortgage broker, the more property types you can finance — and the more options you have to finance them with — the better your odds are for success.
As we quickly approach the tail end of a nearly decade-long run of growth in the commercial real estate market, one could argue the low-hanging fruit has been picked. Conventional lenders are becoming more conservative and are limiting the property types they will finance. As interest rates and cap rates rise, fewer deals will qualify through these sources, so the need for niche-lending connections has never been more critical to your future success.