Category Archives: Real Estate Financing

Covers all aspects of Commercial Real Estate. Get tips and strategies on how to turn a profit with real estate.

Stay Away From Deal Killers

Stay Way From Deal KillersIt’s true that there are some issues that simply crop up during the course of a loan transaction, and it is often difficult to predict or prevent them. Yet, right at the start, there are often clear red flags of issues that will kill a deal—or significantly change the direction you need to take. If you can recognize these red flags for what they are, you can nip those problems in the bud and save a great deal of time. Here are some common ones:


Find out what your borrower’s credit score is! I know many of you are not set up to pull credit, and many lenders pull credit in final underwriting only and use broker-pulled credit at loan submission, or go off the estimate provided. Borrowers often think they know their credit score but often are not honest with themselves (or you) about it. If at all possible (and if authorized to do so), pull their credit or send them to (for an FTC-sponsored report free to consumers every 12 months) or to, to obtain scores themselves. A clear picture of credit worthiness (and the ability to examine a borrower’s report for any issues) will eliminate a slew of potential problems that could come up down the road. Be aware that some free credit reporting websites have a wider spectrum of scores for borrowers and don’t give an accurate representation of credit. Make sure that the credit report range for the site your borrower is using is between 450 and 850; if your borrower is getting a credit score of 680 on a scale from 350 to 950, its going to significantly skew their actual credit risk profile.

Foreclosures, Bankruptcies, Judgments and Tax Liens:

These are all items which will almost certainly disqualify a borrower from conventional financing, and although lenders have different guidelines with respect to the timing and status of these issues, they are always viewed as negative. Be sure to ask your borrower, up front, if such issues exist and, if so, get a clear explanation of why, when, and what was done or is being done to remedy these action(s). If your borrower is unsure if he has these issues or you don’t feel he is being forthcoming, check the “public records” section of this credit report, it will disclose any of these potential pitfalls.


Clients almost always think their properties are worth more than they are. Do some extra leg work and check up on value. Call a local realtor, ask for a recent or even older appraisal, or look for recent comparables. A solid grasp of value, early on, will set clear expectations going forward. If you feel your borrower’s value estimate is unreasonable so will your lender. Save yourself some time and look professional in front of your investors by determining an accurate value estimate upfront.


There are very few lenders that can work around an environmental issue, whether conventional or private-money. If there is one, your deal will likely die, so ask about it up front and request a recent or even older Phase 1 report, if available. Often Phase 1 reports are very extensive and can be hundreds of pages; to quickly determine if there is a potential issue, skip to the “conclusions and recommendations” section and look for the words: “No further action”.  If there is a Phase 2 or Phase 3 report, you likely have trouble on your hands. Phase 2 reports are only ordered when additional soil, ground water or further testing needs to be done. A Phase 3 report means that actual environmental remediation is being, or was done and this could be good or bad. If the remediation was completed and the state has given the property a clean bill of health then you are in the clear, if there are still lagging issues after a Phase 3 has been done—walk away.

Avoiding Time Traps

Avoiding Time TrapsOur paychecks and reputations depend upon putting financing together for borrowers who often have difficulty obtaining it, so looking for reasons why a loan won’t work can certainly seem like a step in the wrong direction. Yet although I routinely encourage pursuing niche borrowers and difficult-to-finance deals, you need to be able to recognize a deal that will eventually have a light at the end of its tunnel, as opposed to one that will only end in a black hole. The best way to avoid a transaction like these is to look for indicators that it might not be viable, at the very beginning of the process. But (especially if you are new to this business) how will you know the red flags when you see them? Commercial real estate financing can be complex, and even the most seasoned professional can miss an obvious trap, so how are you supposed to catch one? The short answer is: Know your lenders! Each lender you may work with has very specific guidelines as to what they can and cannot finance. Often there is flexibility within those guidelines (and certainly nuances) but, in general, before you send over a deal, you should have access to a clear-cut picture of what financing they supply. Almost all lenders publish either specific parameters or general overviews/program sheets of their offerings. Review those program details and you’ll have the tools you need to save time!

Work on Loans With a Chance

The last thing you want to do when reviewing a transaction with a potential client, is wonder if it is something you can actually help them with. You certainly never want to be in the position of bringing in a loan without at least an idea of a few lenders that you could potentially bring it to. Having a transaction in hand—or worse, accepting an application fee on a loan request—when you don’t know where it is going, is a recipe for disaster. If you find yourself “hoping” that you’ll find a home for a loan that initially did not fit the guidelines of your current lenders, you are setting yourself up for failure. On the other hand, if you know up front what your lenders can offer, you can methodically dissect a client loan application or verbal summary to quickly align it with a potential financing source. Yes, some transactions will be borderline (do they fit your lenders’ stated programs or not?), and in that case you can run a scenario by your lender to see if it’s a fit—that’s what your lender’s rep or account exec is there for; to review scenarios, fill you in on additional guidelines, and give you feedback.

Don’t Bank on Exceptions

As early as possible after receiving a loan application, match up the loan request with your known program offerings, and if there is a clear mismatch, save yourself time, and pass on the transaction! (A clear mismatch does not mean a minor deviation such as a lender’s minimum credit requirement of 680 and a borrower with a 670 score, or a borrower needing a loan-to-value of 70% and a lender that offers only 65%. There are often ways to work within your lender’s programs if there are small differences between the loan request and the guidelines, or if the request still fits market tolerance.) It’s the obvious disconnects that should signal a quick pass: Did you receive a construction request for a strip mall and you don’t have any investor property construction programs? Pass. Got a financing request for an amusement park and don’t have lenders that will consider this property type? Pass. Have you received a request for a $100 million dollar purchase loan, and your lenders can’t go that high? Pass! Remember: The hours you’ll spend shopping a transaction that does not meet basic lender guidelines (and probably landed on your desk because it’s not financeable) are hours you won’t have to work the deals you can place.


Conventional Loans vs. FHA Loans

Conventional Loans vs FHA LoansOne of the first decisions that first-time home buyers make when purchasing a home is whether to secure a conventional loan or an FHA loan guaranteed by the Federal Housing Administration. Down payment funds, credit history, interest rates and fees all play important roles in making this decision. And although many borrowers may wind up preferring the terms of a conventional loan, some may find securing an FHA loan to be much easier.

The Down Payment

Borrowers who put less than 20 percent down often prefer the terms of an FHA-backed loan. The FHA only requires a down payment of 3.5 percent of the purchase price, and the home buyer can use gift funds from an individual or an organization for this purpose. Since conventional mortgages are not government-backed, terms favor buyers with bigger down payments — in many cases, 20 percent or more. And usually, all or most of the down payment must come from the home buyer — not from another individual or organization.

Private Mortgage Insurance (PMI)

Private Mortgage InsuranceBoth conventional and FHA loan lenders require buyers who put down less than 20 percent to pay a mortgage insurance premium. Buyers who secure FHA loans pay 1.75 percent of the loan amount at the closing. In addition, these buyers pay a 0.85 percent annually — even after the buyer’s equity exceeds 20 percent of the home’s value. Although conventional borrowers also pay PMI, lenders eliminate the annual premium once the buyer’s equity exceeds 20 percent — a significant advantage. The FHA borrower may elect to refinance to a new conventional loan once he reaches the equity target — which may eliminate the PMI payment and result in a lower interest rate.

Interest Rates

Interest RateAccording to, FHA loan interest rates are typically higher than rates for a conventional loan. Buyers who secure FHA loans pay a higher rate in exchange for the privilege of having the federal government guarantee repayment — a significant benefit to which any FHA-sponsored homeowner who was underwater but refinanced anyway following the housing crisis can attest. Nevertheless, many buyers accept this risk in exchange for paying a lower rate over the life of the loan. It’s worth noting that if your credit is anything less than excellent, you’ll probably pay a higher interest rate anyway.

Credit Considerations

Buyers who have less-than-perfect credit also find FHA loans appealing, simply because the lending standards aren’t as strict as those of conventional loans. Private lenders cherry-pick deals because they risk their own capital — and if the borrower defaults, the resulting foreclosure often results in a steep loss for the lender. In addition to credit, lenders — both FHA and conventional — consider employment history, income and savings when reviewing loan applications. If you’re deciding between both loans, review your credit history and analyze your finances through the eyes of a lender. The more risk you present, the higher your loan costs will be.

So What’s the right choice?

Making a decision whether to consider conventional or FHA financing is tied to the borrowers current situation, and there is no right or wrong answer. A borrower who does not qualify for conventional financing can be the perfect candidate for an FHA loan. But, It is always best to consult a mortgage professional for advise because they are more in tune with the banks lending practices and requirements.

Structure Your Compensation Correctly

Real Estate FinancingAre you sabotaging your own success? In previous posts I have focused on where to find transactions and who to take them to, all with the goal of making a healthy profit. Clearly, sourcing business and lenders is the most important part of the financing process, because without clients and capital, there is no money to be made! Yet—after they expend the time, energy and (often) dollars to ensure a quality transaction and lender—it always surprises me how many finance professionals shoot themselves in the foot. Without knowing how to maximize your compensation on each loan while staying competitive, you’re pretty much guaranteeing failure before you’re off the starting block.

Don’t Price Yourself Out

“Isn’t a smaller percentage of something better than a bigger percentage of nothing?” If that’s your question, my answer is:  Yes, but with exceptions. I stand by my assertion that your fee should be constant from day one and you should not cut it even if the borrower pressures you. Yet, that doesn’t mean you should price yourself out of the transaction. The borrower is always within his right to ask you to reduce your fee, but if you’re throwing a 3.0% fee out from the start, he may not even ask—he’ll just pass outright. Overcharging sends an instant signal that you don’t know what you are doing; it tells a potential client that you either don’t have your pulse on the market and the competition, or else you’re trying to make your year’s revenue on his deal alone. Either way, you’ve told him you’re not good at what you do. Learn to limit yourself, even on hard money deals. Just because the lender is charging 6.0% doesn’t mean you can, too. On deals under $500,000 keep it to 2.0% or less; $500,000 to $1 million, no more than 1.5%; and over $1 million, 1.0% is the ceiling.

Get Paid by the Lender

Sure, it’s a market of disappearing margins and revenue, but there are still lenders who will pay you for bringing them business. The best way to maximize your compensation is to make sure the lender is also paying you for bringing in deals. It’s important that you learn which lenders pay yield-spread-premium (YSP), rebates or referral fees and focus on originating deals for their programs as your primary business. Any deals that don’t meet these lenders’ guidelines or that you come across, are just gravy, but they are not your meat and potatoes! Keep in mind, though, that when lenders pay you on transactions you originate for them, it’s important that the dollars don’t come from some additional fee they are charging the client. You only want to work with “par” lenders: lenders that charge the borrower zero loan points and still compensate you. When a par lender pays you for bringing in a deal, this means that you don’t have to charge the borrower. When you don’t have to charge the borrower, there are no opportunities for him to try and haggle down your fee, simply because he isn’t paying you one.

Don’t Work for Free

Protect your commission! No; not every deal you work on will close. The important thing, however, is to safeguard the revenue you’ve earned. Whether the lender you’re working with is protecting you on your fees or not, it’s crucial that you have your borrower sign a broker fee agree­ment with you at the start of each transaction. A correct and legal agreement ensures you’ll be able to collect your commission, and protects you from being circumvented. It also gives you the opportunity to collect a small upfront fee for your work in arranging the financing for your borrower. Whether it’s $100 or $1,000; an “application” fee or an “underwriting” fee, collecting this payment will help to ensure your client is committed to working with you, and that you’ll be compensated for your work, whether the deal closes or not.

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.