Today, we are starting a three part series on how to get the best possible loan for your property. Today we begin the series by looking at the three options a borrower has for finding a loan for his property, They are:
- Go back to a lender you’ve already done business with
- Shop the mortgage market on your own, or
- Employ the services of a commercial mortgage broker
In the past, in an effort to sound objective, I would encourage people to choose the option that best met their needs. No longer. I believe you always want to use the services of a competent, journeyman commercial mortgage broker. Why? There are four reasons why this is true and Part I of this series discusses these four advantages over shopping the mortgage market on your own or going back to a lender you’ve already done business.
Four Advantages of Using a Commercial Mortgage Broker
He knows more lending sources than you do.
The first step in shopping for a loan on your own is finding which lenders have the most competitive rates and loan terms. That is not an easy undertaking. The primary advantage of using a commercial mortgage broker is that he knows the lenders who have the most competitive rates and terms. Not all lenders are interested in your specific loan, but a broker likely knows those lenders who are. In fact, it’s his job to know.
A good commercial mortgage broker regularly works with five to fifteen lenders, depending on who is the most competitive at the moment for a particular property type. Sometimes he knows that his most trusted lending sources do not have the rate and terms he needs to win the business. When that happens, a good broker has another ten or more lenders he has called on over the years who would be eager to do business with him again. He will find the most competitive loan terms because, if he doesn’t, he will not get your business.
He has already established a relationship based on trust with his lending sources.
This is one of the most overlooked advantages of employing his services. Developing trust between the borrower and the lender is essential for insuring a successful loan outcome. In commercial real estate, trust is everything. It is absolutely vital for getting a transaction completed.
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 other’s idiosyncrasies, and because of their prior relationship, there is a higher probability of getting the loan closed with a commercial mortgage broker than by you going directly to the same lender. That’s right. You, the borrower, can go to the same lender and be turned down for a loan because you have no relationship with the lender.
The commercial mortgage broker, on the other hand, has done several deals with this lender, and because they know and trust each other, the lender is willing to proceed with a loan application. As a borrower, why not take advantage of these established relationships between the commercial mortgage broker and the lender? Why not leverage those relationships?
Now some people will say that using a commercial mortgage broker will cost you an additional loan fee. That could happen, but it may not. It just depends on the lender. Let’s assume for the moment that such a fee is charged to you. Many times, because the commercial mortgage broker knows where to go to get the best rates and terms, any additional fee is more than offset by a lower interest rate, a longer amortization, or more loan dollars than what you would have found shopping the mortgage market on your own. The old saying “Penny wise, pound foolish” applies here. You may save some money on the front end by not using the services of a commercial mortgage broker if he charges an additional loan fee. But you could easily pay out much more money on the back end without his expertise and relationships.
Compared to shopping the market on your own, this option takes significantly less time and effort.
If you use a commercial mortgage broker, he will do the heavy lifting of finding the right lender and processing the loan. This will save you a great deal of time and effort.
A commercial mortgage broker can be your best advocate should things go wrong.
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 commercial mortgage broker who has an established relationship with the lender. The lender wants to keep the commercial mortgage broker happy because she doesn’t want to jeopardize her relationship with him. He brings her deals, which is in her best interest. She wants him to continue bringing deals to her, so it’s in her best interest to be fair to his clients or next time he may go to one of her competitors.
Now compare the commercial mortgage broker’s importance to the lender with your importance to the lender. In most instances, lenders will likely see you as a “one-off” transaction and won’t consider the loss of your loan as having anywhere near the impact of losing a valued relationship with a mortgage broker. Now consider the loan officer. Can the lender’s loan officer adequately fill this role of advocate if something were to go wrong with the loan? She works for the lender. She is being paid by the lender. Whose best interest do you think she is looking after? Yours or the bank’s?
So the commercial mortgage broker is your best choice to be your advocate if things go wrong with your loan. Neither you nor the loan officer can fill that need nearly as well as the commercial mortgage broker can. A good commercial mortgage broker will “go nuclear” if the actions of the lender are so egregious that it requires drastic measures to handle what she’s done.
The Nuclear Option
Years ago, a lender approved a loan for one of my clients as proposed on the letter of interest. But prior to closing the loan, the lender changed their minds without notifying the borrower or me that they had reduced the amortization from twenty-five years down to fifteen years, effectively killing the property’s cash flow. The reduced amortization was only revealed at closing. I told my client to walk out of the closing without signing anything. The borrower was distraught.
I then wrote a letter to the loan officer’s superior that included a copy of an email from the loan officer stating that the loan was approved with a twenty-five-year amortization. I went on to say in my letter that if the borrower decides to litigate this matter, I would be more than willing to testify on his behalf. In response, the lender decided to honor the original twenty-five-year amortization. And because I chose to go to bat for my client, I lost what had been a good lending relationship. But a good commercial mortgage broker does what he has to in order to protect his client.
So these are my reasons why I believe employing the services of a commercial mortgage broker. Those are my thoughts. I welcome yours.
Doug Marshall is the award winning author of Mastering the Art of Commercial Real Estate Investing. Check it out on Amazon.