A Typical Deal, Part 2

After hearing back from lenders, it’s time to contact the borrower to present him with the quotes. After the borrower picks a quote that suits his needs, a request is sent to the lender for a loan application. Upon receiving the loan application, it is a good idea to meet with the borrower in person to go over the terms. It is important to take some time and do this thoroughly so that there are no surprises down the road. Once the terms have been discussed and the borrower is satisfied and his questions answered, they will sign the loan application and put down a good faith deposit, which is typically one quarter of a percent of the estimated total loan amount.

Next, the broker will prepare the full loan submission document which will eventually be reviewed by the lender’s loan committee before being approved. The lender’s loan officer that is working on this deal with you may not be present during the committee review of the final loan submission, so it’s vital that this document is well prepared and has all the necessary information presented in a clear, concise manner.

The first step is to prepare the rent roll. It is best to prepare this portion yourself and then ask the borrower to verify that it is accurate. This way, the rent roll is prepared in a format that you know will work for the lender and the client will like that you’re being proactive and doing the extra legwork. If possible, collect additional documents such as the title report, a copy of the leases and borrower information such as resume, financial statement, and tax returns. The final loan submission might also include credit reports, aerial photographs, site plans, demographic information, and information on comparable properties in the area (comparables), including rental rates and vacancy rates.

After the broker submits the final loan request package and the lender approves it (which will include a lot of back and forth between the broker, the lender, and the borrower with the broker acting as an intermediary), the lender will issue a loan commitment for the borrower to sign. This ends the first stage of the loan process known as “commitment” and starts the next one known as the “close.” Each stage takes approximately 60 days.

Upon signing the loan commitment, the borrower will also deposit a commitment fee (around 2% of the final loan amount) in addition to the good-faith deposit mentioned above. Next, a third party appraisal firm will inspect the property to produce a Phase 1 report and a property condition report. In addition to the appraisal, more documents will be required including zoning letters, property insurance, certificates of good standing, and property insurance. After everything is received and the lender is satisfied, they will fund the money to the borrower and the broker takes their fee.

A Typical Deal, Part 1

Before You Start

A typical deal will run approximately sixty days from loan application until closing and is broken down into two major parts which take thirty days each – commitment, and, closing.

Before the loan application is filled out, a deal is brought from a few possible sources: cold calling, real estate broker on behalf of the client, personal connections through networking, referral from another mortgage broker, usually done in return for a portion of the closing fee, repeat business from previous clients, or other methods. The new deal will either be to refinance an existing property, or a loan to finance a new property that your client, the borrower wishes to purchase. During this initial stage, a broker should collect the necessary information to begin the loan application process. If talking through the borrower’s agent, try to set up a telephone or in-person meeting with the actual client, as this will greatly expedite and simplify much of the process. The more information that is collected, the easier this will be, and will be of help down the road as the deal process moves along.

Week One

At a minimum, it is important to collect basic information on the property and what needs the client has. This information could include current or old sales packages for the property, which should give an idea of what the property is like, its type, location, and ball-park value. Next, a broker will visit the property in person or research it online to get a feeling for the neighborhood and the sub-market. Of note will be the neighboring properties, construction projects, and competitors. The broker will either personally take pictures of the property and the neighborhood or find them online, which will be useful later for the final loan submission.

At the same time, the broker is communication with the client to obtain the minimum necessary information for the loan application, which includes –

• the rent roll (or copies of the actual leases to prepare the rent roll himself
• operating history and statements, i.e. income and expense
• property information and description
• borrower resume
• an old appraisal for the property.

These documents will give you and the potential lender the necessary information to determine whether a loan is feasible, to approximate the terms of the loan and to provide the borrower with at least one quote. Additional documents which are not as vital at this stage but which will be necessary later on include –

• tax returns on the property and borrower
• personal financial statements
• borrowing entity organization documents
• all leases
• site plan
• preliminary title report
• marketing materials for the property

In addition to these documents, it’s necessary to understand the borrower’s motivations for getting a new loan. Why is he seeking the funding? What is his plan for the property? Are his intentions long-term or short-term?

Next, the broker will begin to underwrite the property to produce an analysis of the income, the value of the property, cash flow available to service the loan, and to determine the capitalization rate, market vacancy, and management and other costs.

This is all leading up to estimating the value of the property, what kind of a loan will be appropriate for this property, and the ability of the property to generate enough income to be able to pay the monthly fees associated with the loan. You may also have noticed that we are much more concerned about the information on the property than on the borrower.

This is because risk is determined by the ability of the property to generate enough income to cover expenses and loan payments rather than the credit worthiness of the borrower. A high quality, well managed property is a valuable asset regardless of whose name is on the loan contract. At the same time, if the property fails to generate enough income, the borrower isn’t necessarily interested in sacrificing his own financial well being to save it. This is in stark contrast to a residential loan, because if the borrower defaults they will have nowhere else to live.

Once the initial information is gathered and basic underwriting is complete, these are gathered into a preliminary loan request and sent to the various lenders that the broker has contacts with. Some lenders will reply with quotes which will be discussed in the next post.

Commercial Mortgage Broker

Commercial real estate mortgage brokers can and do earn well into the six figure range. They enjoy a flexible schedule, ability to work from home, a stable market, and fulfilling career and with almost no barrier to entry.

So what does a commercial real estate mortgage broker do? Simply put, they connect investors, also known as borrowers with sources of funding such as banks, life insurance companies, CMBS, and hard-money lenders. Mortgage brokers work on behalf the borrower, to find a loan with the best terms possible for their client. They must be constantly aware of the many factors that make the details of the loan and match those as closely as possible to their client’s needs.

Commercial mortgage brokers must be great at dealing with people and constantly managing multiple relationships with their clients, banks, and third parties such as appraisers, engineers, building managers, and others. In addition, they must understand the various financial factors involved in their deals. They must find a common language with both the borrower and the lending institution.

In a typical day, the mortgage broker will perform any of the following: sales calls to bring in new clients, negotiate between their client (the borrower), the lending institution, and various third parties to bring the most value to their client (in the form of favorable loan terms), travel to see the commercial property, arrange documents, follow-up with clients, lenders, and third parties, perform market research, and underwrite a property. Once a deal closes and the borrower receives funds, the broker will receive their payment in the form of a fee. These fees are typically one percent of the negotiated loan amount, but could vary depending on the size of the loan, the loan terms, whether a deal was referred to them by someone else, and other factors.

To summarize, a good broker will be able to find new clients, also known as Origination, which requires good sales ability. Next they must be able to find an appropriate loan and negotiate the details to match their client’s needs as closely as possible. Finally, a good broker will actively stay on top of their relationships with lenders and the multitude of financial factors to close the deal, provide funding for their client, and collect their fee.

Most brokers will work on multiple deals at the same time, so they will simultaneously originate, work on multiple deals in whichever stages they might be, do their best to close deals that are close to completion, manage as many of their relationships as possible, do additional research, and educate themselves on their industry.

While challenging, the work is also financially rewarding and emotionally fulfilling for those that have the necessary requirements and enjoy working with people and to a lesser extent numbers, in a fast paced, competitive atmosphere.