In an ideal world, each incoming deal would fall neatly into the commercial mortgage broker’s comfort zone and fly through the pipeline to closing without any issues. In reality, however, many potential deals come across the desk that give a broker pause.
Acting as a gatekeeper, the broker mulls over the file, finds it interesting, but reluctantly concludes, “I’ve never done anything like this before, so I’ll have to pass.” After all, the broker does not want to harm the client by overpromising and underdelivering. There is a viable alternative to turning away the deal, however. That alternative solution is co-brokering.
When presented with a new deal, the important question to ask is: “Do I truly have the required expertise to work on this deal by myself?” Answering “no” to that question is perfectly fine for many reasons.
You may not have gained enough knowledge in a niche investment scenario. Or, as a practical matter, you don’t have access to lenders that specialize in a certain type of deal. You also may be at an early point in the learning curve of a particular niche or career — a residential mortgage broker who recently branched into the commercial arena, for example.
Once you have established it is best not to go it alone, the broker’s next thought should be how to join forces with another broker. Teaming up with the right person can be a win for everyone involved — your client, the lender, the co-broker and you.
Finding a partner
The first step in finding a suitable co-broker is to closely consider the deal itself. Gather as much information as you can from the client and immerse yourself in the details. Are you able to boil down the details into a summary that immediately makes sense? In a co-brokering situation, you will have two audiences. It is not just the potential lender, but also the co-broker. You don’t want to tarnish your reputation by presenting weak deals.
If the deal is presentable and capable of being funded, the next checklist item is determining if the potential fees will be enough to share between two brokers. It is tempting to be swayed by the thought that a percentage of something is better than a percentage of nothing. Before proceeding with a deal with a co-broker, however, you should make sure the potential fees will adequately compensate you and your co-broker for the anticipated time and effort.
Consider yourself lucky if you already know a broker with the necessary expertise for the deal, and even luckier if you have successfully co-brokered with that person before. There are some practical methods to finding the right person from scratch. Ask your most trusted contacts for a personal referral. You may choose to identify lenders who specialize in the type of deal at hand and ask them which brokers they like working with the best. You also may have to do your own research, treating this as if you were a client looking for a broker with special expertise in a particular type of deal.
Whatever avenue you use to find your co-broker, it is important to find a partner whose key motivation is the desire to help the client, not just financial gain. When you present the parameters of the deal, does the co-broker immediately say, “no problem,” or does he or she ask probing questions and identify ways to address potential problems before they become deal killers? If it’s the latter, then you likely have found the right ally.
There are two main ways to structure a co-broker scenario, and this structure will depend on the level of communication you want between your client and the co-broker.
First, you can opt for an open relationship in which communication is free flowing among all parties. You, your client and the co-broker should have an initial in-depth discussion together, and then the co-broker should identify a lender and control the loan process from there. In essence, you let the co-broker be the quarterback on the field and you take on the role as the coach on the sidelines. Both of you are striving to cross the goal line. This situation makes sense if you have built up trust from prior successful deals with the co-broker, or if you have a solid noncircumvention agreement in place that prevents your client from being stolen by the co-broker if something goes wrong.
If this is your first time working with the co-broker or you cannot get a noncircumvention agreement in place, there is a second way to structure the relationship. Specifically, you can do a more segregated relationship that establishes exclusive lines of communication. In this scenario, you maintain all contact with your client, while the co-broker maintains all contact with the lender. This way, you protect your relationship with your client, while your co-broker protects his or her relationship with the lender.
Regardless of how the partnership is structured, it is a good idea to enter into a written agreement with your co-broker, or at least have a verbal understanding of how each of you will be compensated for the transaction. Sometimes it is not feasible to agree upfront to a split fee. As the deal progresses, it may become evident that one broker is doing the lion’s share of the work. To protect your reputation and preserve the possibility of working with the co-broker again, be as fair as possible.
Tips to live by
A broker who enters into a co-broker relationship should take some steps to keep the loan running smoothly toward closing.
First, the broker should strive to avoid any unpleasant surprises. Let your client and the lender know about the co-broker relationship from the get-go. Explain to the client that having two brokers is a creative and necessary way to achieve the client’s goals. The lender should know there are two brokers involved and which broker will be the main point of contact.
Second, maintain frequent communication. At the start of the relationship, make sure that you, the co-broker and the client are on the same page regarding key elements of the process, including what the rough terms, timing, fees and required documentation might be. Once a lender is interested in the deal, communication becomes even more crucial, in order to satisfy the lender with the necessary information and to push the deal to closing. Given the extra layer of parties, assure the lender that there is direct and constant communication with the borrower. Schedule regular conference calls to keep everyone on track.
Third, the broker should seek an exclusive agreement to prevent the client from shopping around. Short of that, endeavor to earn your client’s loyalty by instilling confidence that you and the co-broker are collaborating and looking out for the client’s best interests. If you’ve done a good job explaining why two brokers are necessary, your client should have no doubt about your abilities or be tempted to look elsewhere.
As with any commercial lending scenario, a successfully co-brokered loan depends on certain basic principles, such as an early examination of the borrower’s situation and needs, timely communication, and relationship and trust building. By applying simple rules through the process, two heads can indeed be better than one. Under the right circumstances, co-brokering a commercial mortgage loan can be mutually beneficial for the borrower, the lender and the co-brokers.
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Ultimately, from the commercial mortgage broker’s perspective, having two pipelines is better than having one — one pipeline of deals where the broker works alone, and a second pipeline where the broker teams up with a co- broker. Establishing a solid reputation as both an independent broker, as well as a collaborative broker, is one of the keys to building a book of business and maintaining a strong presence in the commercial real estate market.