06/19/2009
To Be Truly Successful in this Market, Educate Yourself
It is no secret that the real estate market is extremely volatile right now. Property values are increasingly hard to pin down, borrowers are less and less able to make payments, and we are facing an abundance of other challenges on a daily basis. In this type of situation, it is more important than ever for brokers to learn how best to sell a deal and to take advice from the lenders they work with to ensure they have a successful transaction.
As a small, private money commercial lender, we have dealt with thousands of brokers over the years. We have seen all kinds of deals—from the craziest, most absurd schemes, to the most solid private money deals that any lender would love to fund. In this market, it is more important than ever that brokers understand what they are doing and communicate in a way that enhances their credibility rather than undermines it.
Many brokers do not know much about commercial real estate lending but profess a desire to learn about it and to do more commercial deals. We often see these people trying to convince us of the value of a piece of property, the manner of calculating cash flow — or any number of other underwriting criteria — when they really know little or nothing about them. A broker is far more effective — and ultimately successful — with lenders when he or she takes the time to learn some of the basics of commercial real estate and finance: DCR, NOI, Cap Rates, NNN, price per square foot, rent per square foot, owner user vs. income property, etc. If there is something he or she does not know, then that broker needs to acknowledge it and be willing to learn from the lender.
With the downfall of residential markets, many brokers are trying to survive by getting into areas with which they have historically been unfamiliar. In this type of circumstance, it is best to follow the guidance of the lenders and underwriters. A broker should find out what their guidelines are and understand the key factors that will enable a deal to close successfully. A broker can then find deals that fit the parameters set forth by the lender and abandon those that do not. One of our top Correspondents has been highly successful due to his ability to walk away from deals that do not meet our standards. The number of deals we see that have no prayer of getting funded–anywhere, at any price, by any lender– is astonishing, and yet salespeople will work for weeks or months on them in hope of a payday that is destined not to come.
To truly be successful in the world of commercial lending, it is fundamental for all brokers learn what does and does not meet the criteria the lenders they are working with have set forth. It is essential to ruthlessly cut out the deals that have no chance of closing and concentrate on the ones that are as close as possible to the guidelines. Doing so greatly increases the potential to make more money, have more fun, and keep borrowers happy!
06/17/2009
The Challenges of Lending in a Down Market
In my over 20 years in the lending business, this is by far the most difficult environment I have seen to try to underwrite loans. Generally, in the hard money business, risk is mitigated by lending a conservative percentage of the value of a piece of property. A lender usually does not want to have to foreclose and take property back. However, if they are forced to—and they accurately valued the property initially—the investment (and most often, the interest) can be recovered. At least those were the old rules and guidelines. It is not so simple anymore.
A perfect storm of factors has combined to make lending extremely difficult. A variety of issues are all combining to drive delinquency rates and defaults up and make it harder to find good new loans worth funding. As everyone knows, the economy has been very hard hit. Unemployment is way up. People are having a hard time earning money, and therefore not spending much. Other businesses are hurt by their customers not spending. Many borrowers have significant cash flow reductions. So on one hand, it is more difficult for people to qualify because they are making less money.
Simultaneously, there has been a tremendous reduction in credit. The mortgage backed security market is basically dormant or dead, certainly for non A grade residential as well as for almost all commercial. Banks are at a virtual lending standstill. Those that are lending have tightened their standards tremendously. Debt coverage requirements are higher, loan to value ratios are lower, credit standards have increased. Thus, fewer people qualify.
Once upon a time, a viable exit strategy for people was to sell their property. With the lack of available capital, it is very difficult for people to qualify for loans. With fewer businesses doing well and expanding, the pool of new tenants and buyers has dwindled. Rental rates are down, capitalization rates are up. What is a property worth anymore? In many cases, there is simply no real market at the moment for lots of property types and people are not able to sell property in a reasonable time frame.
My experience is this. Sellers often list their property for way too much. They are still clinging to what their property WAS worth at some other more favorable point in time, as opposed to accepting the reality of what it is worth today. So, they ask too much for the property and unwittingly shoot themselves in the foot. Many buyers have cash. I know lots of people who sold their property but couldn’t get new financing. So, they paid the capital gains instead of 1031ing into something else, and are now sitting on cash. Yet, they want a deal. They are waiting and waiting and waiting for prices to drop further.
There are different kinds of buyers. There are those that HAVE to do something and those that merely WANT to do something, but have no real pressure to do so at this time. And these buyers just wait for sellers to get desperate. Sellers who have priced their property too high at the outset are not even in the game.
As leases come due, tenants are either moving or demanding concessions from their existing landlords. Once the landlord drops the price, he has set a new going rate for the rest of the space. Lower rent equals lower NOI. As buyers wait patiently for sellers to lower the price (or cannot qualify for financing and have to not buy at all or buy less than they want), capitalization rates increase. Lower rents plus higher cap rates equals dramatically lower prices and values in many cases. As a lender (or a buyer, or seller, or agent, or appraiser for that matter), it is very difficult in this environment to get a firm grasp on what something is really worth. The V in the LTV is VERY subjective, making it much harder to assess risk.
On top of all of the above, delinquencies in basically all asset classes are at record levels. As a result, lenders are looking for new loans that are HIGHLY likely to repay so as to not exacerbate problems they already have with existing portfolios. They are also cutting LTVs to try to further mitigate risk. So what you have is a situation where all at the same time, values and rents are dropping, ability to pay has been seriously hampered, lenders are not lending at all or have tightened their guidelines considerably. Making lower LTV loans on properties that have already dropped significantly in value only to people who can demonstrate repayment ability in a market with double digit unemployment and deteriorating income adds up to the most challenging environment this lender has ever seen.
All this being said, I believe there are tremendous opportunities in many areas. But I’ll save that for another discussion!
06/10/2009
Stop Dialing for Dollars and Make Every Call Count!
Are you new to commercial? Have you received a commercial loan request and quickly found yourself “dialing for dollars,” calling every lender under the sun to place your loan? Are you craving a more efficient approach, and the tools you need to quickly locate a lender? You are not alone!
When residential mortgage brokers look to provide a solution for their commercial clients, they aren’t always prepared with the critical information needed to quickly and effectively obtain a quote. Conversations between commercial lenders and less experienced brokers often follow a pattern like this:
Broker:
“I’m looking to place a commercial loan”
Lender:
“Great. Where is the property located?”
Broker:
“California.”
Lender:
“Where in California?”
Broker:
“My client didn’t give me an exact address, but I can get that.”
Lender
“Ok. What type of property are we talking about?”
Broker:
“It’s a commercial property.”
Lender:
“What specifically is it? What kind of business exists in the property?”
Broker:
“I believe it’s a grocery store, but I’m really just calling for rates and terms to see what you can do.”
Lender:
“I’m going to need some more specific information before I can help you.”
If you are new to commercial lending, and value your time and income stream, here’s a simple guide to better prepare you for each and every lender call. With this information at the ready, you will dramatically reduce your time and effort in finding a lender, and increase the probability of quickly closing your loan and collecting a large commission!
Learn the basic information
It is critical to have the basic information at the ready for every lender you contact. Here’s what you need to know before placing your call:
- Property type
- Be specific. Is it mixed use, retail, church, drive thru restaurant, etc?
- Property location
- Provide a complete address for all properties involved in the transaction.
- Owner/user or investment property
- Lenders must know if a property is owner user or investor. Some lenders only work with one type or the other.
- Estimated property value
For a refinance, determining the value of the property is often tricky. Obtain the tax-assessed value, borrower’s perceived value, purchase price, year of purchase and the square footage of the lot and building(s). Do not order an appraisal before contacting a lender. Many lenders work with a select list of appraisers, while other lenders may not need an appraisal at all, based on the strength of the deal. - Loan amount desired
Determine all the needs of your client before arriving at this number. Debt consolidation, cash out for repairs, operating capital, equipment purchase and countless other factors may add to the total. Don’t forget to include loan costs, as these are often overlooked by less experienced brokers.
Time frame to closing
It is critical to determine your client’s time frame for closing the loan. Some lenders can close in as little as a few days, if necessary. Others take 60 days or more.
- Credit scores
- Pull a credit report before placing your calls to lenders. This will help the lenders identify pricing options.
- Business/ property income & profitability
- The financial strength of a property and/or business assists the lender in determining pricing options.
Do your homework on the lender
There are many sources for learning more about lenders before placing a call. Study their matrix, visit their website, and look for their advertisements, until you feel they are a solid prospect to assist with your loan.
You don’t need to spend lots of time in this stage, but just enough to determine if a phone call is worth your time. In my experience, the most successful brokers spend a few minutes per lender on background research before placing a call. Your time is too valuable to waste placing10, 20 or more calls to every lender in the book. Do your homework first!
Educate yourself about commercial lending
If you’re just getting your feet wet with commercial lending, there are many paths to obtaining a greater understanding of the commercial side of the business. Several trade publications, such as this one, will familiarize you with the terms, scenarios, regulations, and industry news of commercial lending. There are lending books, dictionaries, and seminars that will help as well. (A good source is the Mortgage Bankers Association website and bookstore).
Perhaps the best way to learn the commercial side of the business is through a mentor who has considerable expertise in this niche, and the willingness to share that knowledge. The most likely source of this expertise is often a commercial broker in your office who can consistently share their knowledge over time, and as commercial loan opportunities arise.
Understanding the basics of commercial lending will put you ahead of 90% of residential brokers who happen to have a commercial deal fall in their lap. Every call you make will be far less time consuming, less painful, and more productive, when you have the knowledge of an experienced commercial broker on your side!
Put these tips to the test!
It’s always a temptation to immediately start “dialing for dollars” when a client comes to you for a commercial loan. Resist that reflex, and you put yourself ahead of 90% of the brokers in the business by fully preparing for every lender call you make. Before long, you may find commercial loans to be a huge component of a successful and highly lucrative mortgage career!
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