Commercial mortgage lending is being seen as a salvation by many residential real estate brokers. Some of these brokers are brand-new to the field, while others shifted their focus away during the residential boom. Today's market, however, is forcing them to return to their original gaze.
Ed Craine, co-owner of Smith-Craine Finance in San Francisco, is among the new wave of brokers who are putting a greater emphasis on commercial loans. That focus accounts for 80% of his company's business, up from 40% two years ago.
‘I've cultivated a number of local and regional banks where they like having a broker relationship,’ he explains. ‘But not all fit into that category. Some are not broker-friendly.’
Craine says he typically originates loans in the $1 million to $10 million range – a size that these banks prefer. ‘These banks are looking to keep their volume up in a difficult market,’ he points out. ‘Some are just trying to keep their overhead costs down, and if they can find brokers to bring them new business, that's a low-cost way for them to acquire loans.’
But banks' appetite for commercial loans is always changing, he observes. ‘It comes and goes,’ he says.
Charles Eck, president and owner of Westmont, Ill.-based brokerage Lincoln Mortgage and Funding Corp., notes that lenders have shown different degrees of enthusiasm for these new brokers.
‘Some lenders have taken the view that once a broker has made the introduction [of a borrower], it's 'get out of the way and we'll take it from there,'’ he says. ‘Other lenders appreciate the work that brokers do. A lot of that depends on the experience and expertise of the broker as to which path the lender might take.’
A good broker, he explains, can add value to a transaction by facilitating communication between the bank and the borrower.
‘He can take developer-ese and convert it into mortgage-ese and vice versa,’ says Eck. ‘So he should be multilingual in those two dialects in order to help facilitate and expedite the requirements of both the lender and the borrower.’
Ambivalent feelings
Lenders often have mixed feelings about the new trend. It can mean more business, but also more headaches.
‘We are seeing more and more residential brokers attempting to get into the commercial side,’ says Rick Sleight, a partner with La Quinta Capital, in La Quinta, Calif. ‘But they're having some trouble getting up the learning curve because it's not a walk in the park. And when they see only one or two deals and don't see a whole volume of deals, it's really hard for them to get up the curve.’
‘There are some people on the broker side,’ says Craine, ‘who haven't spent enough time educating themselves well enough to hold up their end of a deal.’
‘You have to maybe look at 20 deals,’ says Jeffrey Pirballa, a managing director of wholesale commercial lender Real Estate Capital Co., Charlotte, N.C., ‘to get one that has some financial merit. When you're dealing with the newer commercial or residential/commercial brokers, usually it's just a function of the lack of information they have. So the files are very, very incomplete.’
According to Pirballa, a broker will often say that the borrower has a good FICO score and the property is in a great area and then will ask, ‘What kind of rate can I get?’
‘We have no clue,’ Pirballa exclaims, ‘because we have to take a look at the occupancy, the operating expense ratios, how the property is being run. A lot of residential brokers don't realize that. Many still look at it like it was a residential loan.’
Still, Pirballa admits that 90% of Real Estate Capital's wholesale business is from brokers. ‘And it seems we have a lot of repeat business from our brokers,’ he adds.
But today's problematic economy has permeated this sector, too.
‘We're probably rejecting more than we have in the past,’ comments Mike Anderson, vice president at Columbus, Ohio-based Lighthouse Commercial Mortgage, ‘simply because brokers are looking for loan-to-value that is unrealistic in today's market. Underwriting standards have become so much tighter.’
Other brokers also can get discouraged when they see prospects of only a few deals and not a large volume, he adds.
The desperate actions being taken by some newcomers in order to find and close deals are upsetting him and some other lenders. Anderson, who says that it sometimes seems that there are more brokers trying to do commercial deals than there are actual deals, complains that some newcomers are chasing deals, competing with other brokers, hoping they can offer a prospective borrower a better deal.
‘I've come to believe that an awful lot of residential brokers are going to posting sites, looking for loans and creating a daisy chain of brokers who are, in essence, chasing the same deal,’ he says, stressing that he is looking for brokers who are dealing directly with borrowers. This has led him to first ask brokers whether their borrowers are their direct customers.
‘If so, then we can progress,’ Anderson continues. ‘If not, then it's just something they're trying to chase to see if they can tell somebody else there might be a deal. They're trying to beat the deal the borrower already has been offered.’
Sleight notes that too many brokers go out on the Web to try to locate potential borrowers all over the country.
‘By the time they get to us, it's a chain of brokers,’ he comments. ‘It's become a broker-broker deal with too many people in it to make any sense. It becomes inefficient. But we're seeing more of that. We want to talk to the broker that's directly talking to the client. We feel that way, we're going to have some control over what's going to happen.’
‘If a deal is being shopped,’ says Pirballa, ‘we'd rather have those brokers go out and get the best deal they can and then come to us for a last look.’
Pirballa feels that often supporting data can get ‘manipulated’ or ‘miscommunicated’ as a loan request gets passed from broker to broker, and for this reason, his company ‘shies away’ from them.
‘Often, after we pencil the deal and issue a conditional approval and seek the supporting information,’ he says, ‘it comes in very different than what we saw initially.’
Most common is an erroneous rent roll – a 98% occupancy rate, for example, is found by an inspector to be only 88%, Pirballa explains. ‘You never really get to the truth until a deal is in process, money is up and a borrower's money has been spent,’ he says.
Pirballa recalls a recent deal that was about to close when he discovered the broker who brought the deal in was not the originating broker. Furthermore, the demand letter from the originating broker had an ‘egregious’ three-and-a-half points on the front.
‘We walked away from that,’ Pirballa says. ‘Oftentimes, when we have a very new broker who's residentially oriented and doesn't understand what's required on the commercial side, we set up a conference call with the broker and the borrower. That usually works out the best.’
Frequently, Anderson points out, a great deal of screening of brokers takes place over the phone. ‘We don't create a log for a loan until we actually take a loan application,’ he comments.
Lincoln Mortgage's Eck says that, on commercial deals, his company seeks an exclusive arrangement with the borrower so that it can then focus on finding the right lender. Without an exclusive arrangement, they'll still work to fight a loan but without the focus and dedication given to an exclusive borrower.
But some brokers, like Janis Graham, a loan officer at Dover Mortgage in Charlotte, N.C., complain about real estate agents' lack of knowledge about commercial lending the same way lenders complain about brokers' lack of knowledge.
‘Lenders want to know the whole scenario before they'll even give me a quote,’ she says. ‘Some real estate agents are a little taken aback by that. They keep asking me for a pre-approval letter.’
Speedy learning
In order to help bring many brokers up to speed, the National Association of Mortgage Brokers is now offering a series of webinar programs and on-site courses through state broker associations.
‘There used to be two courses,’ says Pirballa. ‘Now, it's four courses on the national level, and they're all in the process of being revamped.’
Those courses are typically filled, he adds. ‘It's standing room only. At one of the state conventions, it's nothing to have over a 100 students at one of these courses.’
Another commercial lending instructor, Ed Craine, co-owner of Smith-Craine Finance, in San Francisco, says that his classes generally range from 15 to 50 students but that more than 500 brokers have attended classes held at recent broker conferences in Los Angeles and San Francisco.
‘It will be interesting to see if that trend continues,’ he says.
Many small wholesale lenders spend much time patiently educating brokers who are new to the commercial business.
‘We'll do a lot on the education side,’ Pirballa admits. ‘If we take a look at a deal and it seems to have financial merit and that deal is being brought to us by a residential or residential-oriented broker, as long as the deal makes sense, we'll do what we can to help that broker – and usually, that results in a conference call. We're fine with that, since the vast majority of our business comes from our broker base. We're definitely broker-friendly.’
Pirballa is not alone in this regard. ‘I hear a lot from lenders,’ says Craine, who is a certified instructor for Texas Association of Mortgage Brokers and the National Association of Mortgage Brokers. ‘It's challenging for them to deal with the newbies. The time for training them can be pretty significant. On the other hand, a lot of new commercial lenders are marketing themselves toward residential brokers. They're willing to spend time training. They see that as part of the cost of doing new business.’
Jerry DeMuth is a freelance writer based in Chicago.
