Category Archives: Business Finance

Information on financing options for small busineses.

Mortgage Loan Success

Give Your Loan the Best Chance for Success

Real Estate ClosingEver wonder why a lender turned your deal down when you thought it was great? Your borrower had money in the bank, made a great salary and the property was beautiful with solid cash-flow, but no sooner had you hit “send” on your submission, than your lender was already passing. Why, you ask? By understanding how lenders are looking at transactions in this market and what underwriting guidelines they employ, you will improve your chances of getting deals closed.

Lenders Are Still Cautious

Whether it’s Vinnie on the corner running numbers, or JPMorgan, lenders are still shaken up about the faulty loan decisions they made during the lending craze. Regulators, share­holders, investors, the media and people in general have a watchful eye on Wall Street and real estate lenders right now, just waiting for them to make another stupid move. At the same time, foreclosures and struggling businesses persist everywhere, making the need for lenders with much-needed capital even more acute. Is it any wonder lenders find themselves in uncomfortably precarious territory (and in many cases deservedly so) when it comes to making new loans? They have to be sure they make the “right” loans. And, these days, the only loans they can make are on those properties that won’t end up on their liquidation block. When you pick up a deal, the first thing you should ask yourself is, “Is this a property the lender will end up owning?” If the answer is yes, move on.

Stick to the Facts

When it comes to a lender’s decision on a transaction, your opinion means very little. Actually, who are we kidding? It means nothing. So why do you keep giving it? Lenders have their underwriting guidelines for a reason. In fact, don’t think of them as guidelines, think of them as the Great Wall of China: You’re not getting around them. It doesn’t matter how well you pitch the deal to the lender, how much you like the deal, or how many excep­tions you think the lender should make. The loan decision has to suit the lender’s purposes. Even if a lender says its underwriting is “flexible,” you need to understand that flexibility is in comparison to other lenders, yet still within specific underwriting parameters.

Mirror, Mirror on the Wall…

Is your deal the fairest of them all? Lenders aren’t letting any ugly old deal just slip past the velvet rope these days. Below are the initial techniques they are employing to ensure they don’t loan-to-own.

1) Find reasons not to make a loan on the transaction. Aka, cherry pick. It’s the rule of supply and demand: Too many loans need money, and there isn’t a ton of money to go around. So, lenders are looking for flaws in packages, unorganized or confusing submissions, incomplete applications, inadequate ratios, credit issues, value concerns, deferred maintenance, unappealing locations, and almost anything they can reasonably justify, to not do your deal.

2) Determine the most conservative offer the borrower will take. (If you’ve made it this far you’ve won half the battle.) Why make a loan at 70% LTV, if the borrower will take 65% and the lender’s risk exposure is decreased? This is the one aspect of the transaction where you do have some power, so follow the first rule of business and start high! If your client has told you she can take 65% LTV but would really like 70% LTV, ask for 75% and you may just win out.

3) Get the borrower to accept the offer before the heavy lifting. Most lenders aren’t fully under­writing files until they know that the borrower will be on board with their terms. Once they’ve vetted the transaction from the initial information submit­ted, they’ll want the borrower to sign their term sheet, before rolling up their sleeves. Just because you received an LOI doesn’t mean the lender can or will fund it.

4) Search for risk. The borrower has put pen to paper, all lender-required documents have been collected, and the lender goes through each item with a fine-tooth comb and that “loan-to-own” mind­set we covered earlier. This is when a transaction that passed with flying colors when you underwrote could get rejected once lender metrics are applied. Make sure you clearer understand the lender’s underwriting guidelines and requirements before having your borrower move forward with the lender’s LOI and pay a deposit.

Don’t Ignore Small Loans

Money PlantAt one time or another, we’ve all been guilty of chasing those large pie-in-the-sky deals, telling ourselves that the massive amounts of time, energy (and, sometimes, money) we pour into working those files will one day pay off with a huge commission that will have made it all worth it. I am not suggesting that you stay away from large loan transactions; certainly, some of them are worth your time. No—the message is simply: Don’t put all your eggs in one basket and avoid the small “pesky” deals that can actually offer you a regular income stream to subsidize your dream of knocking off one of those white elephants.

Help Yourself by Helping Others

When thinking of the returning appetite so many lenders are once again having for small deals, I can’t help but think of the famous lines inscribed on the Statue of Liberty, “Give me your tired, your poor, your huddled masses yearning to breathe free…” We’ve all felt a little bit like this over the past few years, and now it’s time to start giving the borrowers who need the greatest amount of relief a chance to get back on their feet and breathe free. The term small loan may be relative but ordinarily means a loan size from $50K to $500K in this industry. The capital markets turned their backs on these deals because small loans (small properties) tend to reside in the worst hit markets, and were the first to default.

Lenders are starting to remember that it’s the small loan borrower and business owner who drive the economy, and that they once made a lot of money making these loans. At one time, small loans had the highest concentration of lenders but now have the lowest. This makes it a new niche market, giving you a huge opportunity and competitive edge when going after small loans.

Small Loan, Not Small Commission

One of the main reasons lenders and brokers alike still pass on small deals, is that they believe there isn’t money to be made anymore. But that just isn’t the case. Whether a bankable or un-bankable small loan, there are programs available that give you the ability to make from 2.0% to 4.0% of the loan amount. Check the math: 4.0% of a $500,000 loan is $20,000. Even 2.0% of a $500,000 loan or 4.0% of a $250,000 loan is still $10,000.00—an excellent commission on any deal. When deals are bigger, there’s more competition and often you’re lucky if you can make 0.50%. That means you would need to find and compete for a $2,000,000 loan in order to make the same commission that you probably wouldn’t have to compete for on a $250,000 – $500,000 deal. Simply put, small loans make sense!

Don’t Forget to Diversify

You not only need to go after bankable and un-bankable deals, and bring small loans into your business plan, but you do still need to pursue the large deals, too. After all, there is a reason we and others offer programs with the capacity to fund $5 million to $100+ million loans—because those deals are out there, and under the right circumstances they can get done. Where most brokers err (but you won’t!) is in focusing exclusively on larger deals which, as I’ve said, can take a lot longer, suck up a lot of your time and energy and, in many cases, fall apart at the end. The last thing you want to do is spend a year working on a big loan that doesn’t come through, leaving you with no income because you didn’t branch out. So keep an eye out for the small deals, market toward them, diversify, and you’ll end up building a solid business and an impressive commission stream, with very little effort.