Doug Marshall, CCIM
You have three basic options to consider when shopping for a commercial mortgage loan. You can choose to:
- Finance your property with a lender you already do business with,
- Shop the mortgage market on your own, or,
- Employ the services of a commercial mortgage broker to shop the market.
As self-serving at that may sound, come to your own conclusion as you review the advantages and disadvantages of each option discussed below.
Option #1 – Finance your property with your existing lender
Convenience is the primary advantage of financing your property with a lender you currently do business with. It certainly is the path of least resistance and in most cases it should be the quickest way to get the job done.
The disadvantage of this approach is that you will never know whether you received the best rates and terms currently in the market. The likelihood is that another lender will be more competitive than your current lender.
Option #2 – Shop the mortgage market on your own
The advantage of this option is that you have a higher probability of finding better loan terms than financing your property with your existing lender.
The disadvantage is that it will take considerably more time and effort on your part. If you take this option I have these suggestions for you:
1. Hunt down the most competitive lenders
Contact commercial real estate professionals (real estate brokers, appraisers, escrow officers, etc) or other owners of commercial real estate who can recommend lenders for you to contact.
2. Contact several lenders for loan quotes
To do this correctly you should put together a preliminary loan package that includes at a minimum the following documentation:
a. Two years plus the current YTD operating history on the property,
b. A current rent roll,
c. Photos of the property,
d. Personal financial statements on the borrowers,
e. Two years of personal tax returns, and
f. A brief resume on the owners
Ask each lender to provide you their loan quote in writing. Fight the urge to accept a loan quote over the phone. A loan quote over the phone is meaningless. Get it in writing.
3. Let Lender A know that Lender B has a better loan quote
It is not uncommon, even in today’s lending environment, that if a lender knows they don’t have the best quote on the table that they will go back to their underwriter and see if they can tweak the quote to make it more competitive.
Asking for an improvement in a loan quote should be done tactfully. If done in a heavy-handed manner it will only irritate the lenders which may backfire.
4. Do not focus too heavily on one loan parameter
Often times a borrower chooses the lender that they consider best based on one particular “hot button.” There is nothing wrong with this approach, but a better approach is to review the pros and cons of each loan quote and then decide.
It is not uncommon that when comparing the loan quotes in detail, another lender is chosen rather than the one originally considered the borrower’s first choice.
5. Do not dribble the loan documentation to the lender
Once you have chosen your lender, one of the most important recommendations I can give you is to make the loan process as easy as possible for the lender. You do this by completing the lender’s forms quickly, thoroughly and accurately.
A borrower who is unwilling to focus on getting the forms to the lender in a timely manner is putting the loan at risk.
6. Do not violate the “golden rule” of lending
…Which is, “He who has the gold makes the rules.” Each lender has its own unique way of underwriting, processing and closing loans. Don’t get into an argument about their process. Provide them with what they are asking for and you’ll be better off in the end.
Option #3 – Employ the services of a commercial mortgage broker to shop the market
There are four distinct advantages of taking this option:
- The primary advantage of using a mortgage broker is that they know which lenders have the most competitive rates. It’s their job to know.
- Compared to shopping the market on your own, this option takes significantly less time and effort on the part of the owner. Much of the “heavy lifting” of finding the right lender and processing of the loan is performed by the mortgage broker, not by you.
- Establishing trust between the borrower and the lender is a vital component to insure a successful loan outcome. If you’ve never worked with a particular lender, a trust relationship has not been established.On the other hand, a commercial mortgage broker may have worked on several loans with this lender.
They know each other. They know each others idiosyncrasies and because of their prior relationship there is a higher probability of getting the loan closed with a mortgage broker than by you going directly to the same lender.
- There are times in the loan process where you need someone to be your advocate, someone who strenuously defends your best interests. This can best be accomplished by a mortgage broker who has an established relationship with the lender.
The lender’s loan officer inadequately fills this role as they work for the lender. They are being paid by the lender. Whose best interest do you think they are looking after?
The disadvantage of this option is that it may cost you an additional fee or a slightly higher interest rate for using the services of a mortgage broker, but it may not. It just depends on the lender.
If you decide to use a mortgage broker I have these suggestions for you:
- Do not interview residential mortgage brokers. Do not consider using the services of a residential mortgage broker as they do not have the expertise to finance commercial real estate.
- Interview more than one commercial mortgage broker. Get two or three recommendations for commercial mortgage brokers to interview. Prepare several questions ahead of time.Through the course of the interview find out whether you can trust them, whether they are competent and whether they are likeable. Finish your interview with this question: How are you different than your competition? Then choose one, and only one.
- Do not use more than one commercial mortgage broker. When a borrower uses the services of more than one mortgage broker without their knowledge, all trust between borrower and broker evaporates.If Mortgage Broker A calls their lending sources and finds out that Mortgage Broker B has already talked to one or more of their favorite lenders, do you think Mortgage Broker A is going to work as hard on this loan request? Not a chance.
- Request a side-by-side comparison of loan quotes. A good mortgage broker will get you multiple quotes and then show them in a side-by-side comparison. At the top of the page will be Lender A, Lender B, Lender C, etc.Down the page will be all the loan parameters a borrower needs to know in order to make an informed decision, such as loan amount, interest rate, loan term, amortization, loan fee, other financing costs, type of prepayment penalty, cash required at closing or estimated cash back on a refinance, before and after tax cash-on-cash return, to name just a few.
This side-by-side comparison of the loan quotes makes it much easier to choose the lender that best meets your particular needs.
Whichever of these three options you ultimately choose depends on which advantages and disadvantages are most important to you.
However, I firmly believe that a mortgage broker’s counsel can help a borrower avoid serious pitfalls when shopping for a loan.
A wise man once said, “Plans fail for lack of counsel, but with many advisers they succeed.” That is why an owner optimizes his chances of getting the best possible loan for his property when employing the services of a commercial mortgage broker.