Right now, all commercial mortgage brokers – and especially those that might be arriving from the residential sector – must ensure they have mastered critical areas of the business in order to succeed. These seemingly elementary concepts might be forgotten in turbulent economic times, but brokers that take the time to review them and take them into account during their everyday dealmaking will find success.
You need to build a reliable network of lenders. You need to know what these lenders like and what their individual niches are. You need to be an expert at prescreening deals. You need to understand how to sell on this side of the business.
First and foremost, you will find that having a solid group of lenders with which to work is critical to your long-term success. Having just a list of lenders is a good start, but you really need relationships.
Specifically, you want the business development officers to respect you and know who you are. You want them to believe that you know what you're doing. If they believe in you, they'll be spending their time trying to get a crack at your deals – rather than trying to avoiding your calls.
What you want is for them to level with you and share information they normally wouldn't reveal to others.
To do so, you will have to be an expert at each individual lender's niche, which – in itself – is no easy task, especially in a market that has drastic daily changes. There is no easy button on this one. This information is knowledge that is earned the hard way: just by getting out there, doing deals and learning banks' appetites.
The importance here is if you know what the best banks are for an individual deal, you will save yourself and your client a tremendous amount of time. You will not be calling banks and submitting files to uninterested partners. You will be reviewing term sheets with your borrower and scheduling closings.
You've got to be an expert at prescreening deals as well. Keep in mind that of all the deals you look at, you generally will not be able to close half of them. If you try to work on deals that cannot be funded, you'll waste all of your time and energy. Every day, you are burning cash, and you will not have anything to show for your hard work.
It is normally all too easy for a new commercial mortgage broker to work on these ultimately impossible deals. For one, the borrower is willing to work with you. He provides all the documentation you need, and he is respectful and open-minded with regard to deal structures. Why? Because he has already been turned down by everyone else in town – for good reason – and knows it. You're his last hope.
What exactly goes into prescreening deals? A lot. You must know how to accurately read tax returns and financial statements in order to figure out the net operating income, for instance. Don't forget that cashflow is king for underwriting commercial mortgages.
If you don't know exactly how to extract all income out of a borrower's set of tax returns, then you might be guessing that the deal is doable and getting dangerously close to working on an unfundable deals.
Also, as mentioned above, you need to be able to match the characteristics of your deal – net operating income, debt coverage ratio, loan to value, building type, location, etc. – with the right bank. Doing so requires you to have a good overall understanding of the details of the loan request and, in turn, submit it to the best sources.
Now, exclusive agreement or nonexclusive agreement? That is the question, and it is certainly a question that runs across many commercial mortgage brokers' minds. If you choose the exclusive agreement, many times, you will lose the opportunity to even work on the deal.
But if you agree to work on the deal without an exclusive agreement (or none at all), you risk not being paid a penny for your hard work. In other words, do you convince the borrower to work with you on an exclusive basis (almost like a consultative arrangment) or are you willing to work on the file without knowing if you're the one who will ultimately be selected?
Imagine this: You work with Johnny the borrower for three months on his loan request, shopping for lenders, helping put together his financial package, having multiple 30-minute conversations on the phone with him, reviewing term sheets and so on. He gets his side of the deal hammered out (due diligence, down stroke, partners, etc.), and you do your part and deliver several rock-solid term sheets.
You're confident you have a done deal when Johnny calls you up to ask if you can do better because one of his banks has got your deal beat by 10 basis points. You know that you have lost and that the other bank won't pay you a dime. You've just lost the deal, tens of thousands of dollars, months of your time and a little slice of your self-respect.
Because of situations like Johnny's, many brokers will demand that they have an exclusive agreement with the borrower – or they won't bother to work on the deal.
All of the essential dealmaking components are tied together. Most importantly, brokers new and old need to take the time to learn these areas cold to position themselves as experts in their craft to succeed, no matter what the market.
Jeff Rauth is president of Commercial Finance Advisors Inc., based in Birmingham, Mich. He can be contacted at (248) 885-8797, ext. 211.
