So, you have been hunting for a commercial real estate loan for a client. You ring up an alternative lender and start firing away questions: What are your rates, your fees and your maximum leverage?
Hold on. Back up. Although these are good questions — necessary questions, in fact — let’s start with the bigger, more important question: What is your client trying to accomplish? This will determine the road you take.
Far too often, commercial mortgage brokers start the conversation with the bottom-line price. To be a star broker, however, you need to think like a lender. Good alternative lenders will initially want to talk about the wants, needs and goals of your clients, so they can structure deals that make sense for everyone involved.
The price of a commercial real estate loan is important, and should be designed to reflect the deal requirements as a whole. When searching for the best lender, the most important question is, “When do we need to close?” Speed is where alternative lenders excel. It’s like choosing between driving the Porsche or the minivan when Johnny’s soccer game is about to start, and you’re still home toasting his strudel. The minivan may be the most economical choice, but you don’t want to miss the game.
The decision essentially boils down to the time value of money. Can your client wait three months for a bank to approve a loan with a 4 percent interest rate, or do they need to close now?
Smart real estate investors measure a deal’s bottom line by the overall profit, not by the note rate they paid. They put a value on the ability to capture a deal and are willing to temporarily pay a higher rate to achieve it. Your client, for example, might pay a premium of two percentage points above the bank rate for a loan from an alternative lender so they can avoid a bidding war in a tight and competitive market. The slight cost premium makes sense if it allows a three-month head start on townhome construction, for instance, thus enabling the investor to finish on time and reap the benefits of the current selling cycle. Speed is the difference between making a deal happen and letting it slip away.
Choosing private money
If your client has the luxury of time, go to a bank. You will likely receive the most favorable terms and lowest price. The trade-off is that it takes longer. Banks are heavily regulated and require stacks of documentation. Ultimately, a bank will fit your client into box A, B or C, and the price will correlate to the box.
Alternative lenders are different because almost every deal structure is unique. Borrowers may come to an alternative lender when a bank’s compliance department feels uneasy with the unique deal requirements. Passage of the 2010 Dodd-Frank Act imposed heightened regulations, primarily on banks. Alternative lenders generally are subjected to fewer government regulations than banks, allowing them to make in-house decisions that are more pragmatic and real estate-focused.
This is not to say that alternative lenders don’t do their due diligence. Alternative private money lenders, for example, are different than hard money lenders. They align with traditional lenders in terms of their level of independent due diligence, the quality of deals they fund and the quality of borrower they seek. The loans are priced with a small premium above the bank rate to compensate for performance. Hard money lenders, by contrast, typically charge much higher interest rates, place less emphasis on the quality of the deal and the borrower, and are quick to start foreclosure action even with minor defaults.
Alternative private lenders still require documentation, third-party reports and so on. Yet, it is their flexibility to work through the imperfections of a deal that make them much more fleet of foot. These lenders can work through the hiccups that were deemed deal killers by traditional lenders. It is real estate lending with an entrepreneurial spirit.
Finding the right lender
Within the alternative lending space, there are an overwhelming number of options. Some lenders are more expensive, but will push their leverage levels higher. Others are more conservative on their leverage but offer a lower price. The best alternative lenders, however, have the ability to be flexible in all categories.
A telling sign of a reputable alternative lender is the company’s history. Ask them how many years they have been in business and about their market share. Do they have a professional website, professional people and top lending products? Chances are that if they have established themselves over time, they did not do so by overcharging clients or by acting like a loan shark. Proven alternative lenders recognize the importance of relationships.
Some of the more established alternative lenders, particularly fund-based lenders, can be especially creative in structuring your deal. They have discretionary access to their own funds and generally are able to offer what is important to your borrower, whether that be higher leverage, low fees, a lower rate or a combination of these. Typically, their level of service also is superior. They’ve grown to a point where their products are customizable, and they likely have more in-house service departments.
Setting top priorities
The needs of your clients will vary. A builder client, for example, may be willing to pay a small premium to an alternative lender that has an in-house construction department with construction software that gives the builder/borrower better control of the draw process. Another client may be looking for the lowest rate and no perks. This is somewhat like the choice between luxury and budget airlines. Knowing you have to pay extra for your checked baggage, snacks and a preassigned seat on a budget carrier will appeal to some and deter others.
The final sign of an excellent alternative lender is one that is genuinely concerned about the client’s ultimate success. Do not overlook this fact: A trustworthy and sustainable alternative lender will ensure a deal can be structured in a win-win fashion before committing to it. They are willing to work alongside the borrower, because they know the client’s success ultimately leads to their success and to repeat business from both the client and the mortgage broker.
An alternative lender is by no means better than a traditional lender, but an alternative lender is more suitable for certain situations. Standard U.S. mail and FedEx are both reliable postal services. A Porsche and a minivan are both quality vehicles. Luxury and budget airlines both employ well-trained pilots and staff. The difference is that you use each of them for specific reasons.
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So, the next time you ring up an alternative lender you may find it more effective to explain the situation, before diving into rates, fees and maximum leverage levels. After you have clearly laid out the scope of the deal, a good alternative lender will be able to quote an accurate price and creatively structure a meaningful deal that works for all parties involved.