Commercial Loans Blog

Commercial Loan Origination is a Race

Posted by George Blackburne on Mon, Aug 29, 2011

If you are a bank loan officer responsible for making commercial real estate loans, or if you are a commercial mortgage broker, it is absolutely essential that you grasp the following concept:

Commercial loan origination is a race, not a rate bidding war.

men in suits runningThe practical effects of this are HUGE, and I'll explain them in a bit below.

I own two commercial mortgage companies - Blackburne & Sons, which is a very old hard money commercial mortgage company, and C-Loans, Inc., which is the largest of the commercial mortgage portals.

I started to notice that some of the very cheapest commercial real estate lenders on C-Loans.com were not closing many commercial mortgage loans for us.  At the same time, a handful of obscure banks, with rates 25 to 50 basis points more expensive than the cheaper lenders, were absolutely tearing up the system.  We have had several relatively unknown little commercial lenders close more than 50 commercial loans for C-Loans.

When I would ask the big banks why they weren't closing many commercial loans for us, they would often answer, "Gee, George, I call the borrowers, but they never return my phone calls."  Strange, huh?

Over time I finally recognized that once a commercial mortgage borrower reaches a commercial lender with reasonable rates - say, within 0.50% of the best market rate - he stops returning phone calls from other lenders.

There is a very important moral to this story.  If you want to succeed as a commercial mortgage loan originator, you must learn to drop everything the moment you get a commercial mortgage lead and call the borrower immediately.

For example, suppose you arrive at work wanting to call your child's teacher about his missed homework assignment.  You also find a fresh commercial mortgage lead on your desk or in your email box.  Who do you call first? 

It's all about speed, silly!  Call your commercial mortgage leads at once. Remember, once a commercial mortgage borrower reaches a commercial lender with reasonable rates, he stops returning phone call from competing lenders.  

For me, this is counter-intuitive.  You would think that a sophisticated commercial borrower would shop the market.  In reality, they simply don't. It probably has to do with the fact that their time is so very valuable, either flipping commercial buildings or manufacturing widgets.

Whatever the reason, the important point to grasp is that most commercial borrowers do surprisingly little loan shopping.  Therefore, if you are not the first commercial mortgage loan officer to reach them, you're probably already toast.

So learn your lesson.  When you get a commercial mortgage lead - BOOM - drop everything, and call that lead immediately!

 

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Topics: commercial loan officer training

Commercial Mortgage Brokers on Crack

Posted by George Blackburne on Tue, Aug 23, 2011

I just received a call from a commercial mortgage broker.  He was obviously a rookie, and he wanted to tell me all about the $54 million loan and the $21 million smokingcrackloan that he was working on. I kept thinking to myself, "This guy must be smokin' crack."

C'mon, folks, the only commercial loans that are closing today are SBA loans, USDA Business and Industry Loans (B&I loans), and small (less than $3 million) commercial loans on standing commercial properties. 

Unless you have an entire pipeline full of small, bread-and-butter deals like this, you are going to starve as a commercial mortgage broker.  Remember, a reasonable closing rate on commercial loans these days is about 1/15. 

To make matters worse, you will probably have to submit the one commercial loan that eventually closes to at least 40 or more different commercial lenders.  In recent conversations with old veterans of the business, they are telling me they have had to submit their commercial loan to over 100 different commercial lenders before finding a home for the deal.  This is a tough-tough market.

Here are the kinds of deals that have a virtually zero chance of closing:

  1. Construction loans (unless it's an SBA or USDA deal).
  2. Land loans
  3. Land development loans
  4. Commercial loans larger than $3 million (unless it's an SBA or USDA loan)

C-Loans.com is the largest of the commercial mortgage portals, and it's free.  You can quickly submit your four-minute mini-app to 750 different commercial lenders.

 

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Topics: Do-able Commercial Loans

What is a Correspondent (Commercial Mortgage) Lender?

Posted by George Blackburne on Mon, Aug 22, 2011

Whenever a mortgage company boasts to you that they are a correspondent lender for so-and-so bank, alarm bells should go off in your head.  Warning, Will Robinson, Warning!  We have a probable liar here!  Ninety percent (90%) of the mortgage companies that boast that they are correspondent lenders are full of beans. 

Here's another example of a common lie in the commercial mortgage finance industry: "We are merchant bankers."  Sure you are.  Ninety-nine percent (99%) of the mortgage companies that boast that they are merchant bankers are also full of beans.  A real merchant bank is usually a subsidiary of a life insurance holding company or a bank holding company that is funneled money by the profitable holding company to make go-go investments, like mezzanine loans or equity investments.

Going back to the subject of correspondent lenders, here's what a real corespondent lender is:  A correspondent lender is the eyes and ears for a long-standing lender in a particular market; say, Boston, New York City, or the Los Angeles area.

Correspondents get paid by being awarded the loan servicing rights, typically around 12.5 basis points (1/8th of a point) per year.  Therefore, the fastest way to bust a blowhard is to ask him if his commercial mortgage company services these loans for so-and-so bank.  Almost invariably these blowhards do NOT service any loans.  They are just garden variety mortgage brokers, and dishonest ones to boot. 

A lot of life insurance companies use correspondents because it is economically infeasible for a small-to-medium-sized life insurance company to have boots on the ground in every desirable commercial lending market in the country.  I have never run across any other type of commercial mortgage lender, other than life insurance companies, that uses correspondents.

 

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Topics: correspondent lender

Commercial Mortgage Referral Fees

Posted by George Blackburne on Thu, Aug 11, 2011

Is it legal to pay referral fees for commercial mortgage referrals?

Yes!  Even in states where a license is required to broker commercial loans (California, Florida, Nevada, Arizona, etc.), you can legally pay a referral fee on a commercial mortgage loan, as long as the referring source does nothing more than to call you with a name and number of a prospective borrower.

 

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 However, if the referral source - say, a commercial real estate broker - starts to negotiate terms (rate, points, term, etc.), at that point he is working as a commercial mortgage broker.  In those states requiring a license to broker commercial loans, the referral source is now breaking the law. 

Therefore, don't let your referral sources try to gather documents for you or to issue loan quotes.  As long as he merely gives you the name and number of someone seeking a commercial loan, it is perfectly legal to pay him a referral fee.

When is it illegal to pay a referral fee for a mortgage borrower?  Under RESPA, it is illegal to pay a referral fee (called a kickback) on a residential loan.  A residential loan is a mortgage loan on a house, condo, townhouse, duplex, triplex, or fourplex.  In the parlance of the Federal government, such loans are called loans on a one-to-four family dwellings.

Is it legal to pay a banker a referral fee for a commercial mortgage referral?

Never be the first to suggest a referral fee to a banker!  Most bankers consider referral fees - even on commercial loans - to be kickbacks.  A kickback is an illegal and immoral payment to a real estate broker to steer his trusting buyers to a particular lender. 

Therefore, if you offer a referral fee to a banker, 90% of them will be horrified.  They will look at you as a leper and probably cut you off.

Most banks also forbid their loan officers from receiving referral fees.  The reason why is because of the potential liability.  Lots of banks have been sued for referring customers to mortgage companies.  If the mortgage company is negligent and the borrower loses a large purchase deposit, such borrowers have been known to sue the bank for a negligent recommendation.

So while it is NOT illegal to pay a banker a referral fee on a commercial mortgage referral, the loan officer can still get in trouble because it is against the policy of most banks for their loan officers to receive referral fees.

That being said, if the banker asks for a referral fee, you should gladly pay it.  There is nothing sweeter than a banker sending you one or two referrals every business day.

How large should the referral fee be?

It's whatever you negotiate, but the standard commercial mortgage referral fee is 20% of your company's gross commission.  Ten percent is also common.

My own hard money commercial mortgage company, Blackburne & Sons, will gladly pay you a referral fee of 20% of our gross loan fee for commercial mortgage referrals.  Please call Tom Blackburne at 574-210-6686 or email him at tommy@blackburne.com.

Blackburne & Sons is looking for commercial first mortgages nationwide of $1.5 million or less on standing commercial properties.  Sorry, no construction loans, no land loans, and no land development loans.

 

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Topics: referral fees

10 Commercial Mortgage Broker Survival Tips

Posted by George Blackburne on Wed, Aug 10, 2011

It's becoming increasingly likely that the economy is headed for a double-dip recession.  If you are a commercial mortgage broker, you will have to be wise, efficient, and energetic to survive.

Here are ten tips that may help you to close more commercial mortgage loans and to survive a double-dip recession:

  1. Close your office and retreat back to the house. You do not need a fancy office to impress borrowers. During the Great Recession, your borrowers will definitely understand your need to keep costs down.
  2. Fire your staff and do the work yourself. You probably cannot afford a loan processor right now.
  3. Don't waste time training loan agents. As soon as they start making you money, they'll leave you for the broker down the street who is offering a 5% better commission split.
  4. The most important asset you own is your time. Learn to say, No," to deals that are difficult.
  5. Use your time to market for that one deal that is actually do-able.
  6. Use maps.yahoo.com to plot every bank near your office. Call on the bank using the sales pitch, "I'll help you get unwanted commercial loans off your books. I have a commercial lender that loves to do discounted pay-off (DPO) deals (Blackburne & Sons)."
  7. Try to personally visit at least one or two local bankers every day.
  8. Build a small list of referral sources - guys who, because of their jobs, see lots of commercial loan requests. This includes bankers, commercial real estate brokers, property managers, other commercial lenders, residential mortgage brokers, insurance agents, attorneys, and CPA's.
  9. Touch these referral sources - either in person, by using snail mail, or by using email - at least once every three weeks.
  10. Plan on eventually - after your borrower has been softened up by three or four bank turndowns - on closing most of your commercial loans with hard money lenders, like Blackburne & Sons. Banks simply are not closing many (any?) conventional commercial mortgage loans these days.

 

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Topics: Commercial mortgage broker tips

Commercial Financing Tools on the Internet

Posted by George Blackburne on Tue, Aug 9, 2011

My second son, Tommy, is taking his beautiful fiancee and our first grandchild away Tommyat Seaworldfrom Indiana and is moving them to Sacramento, California.  He will be soon be working from the Sacramento office of Blackburne & Sons.  (My heart is breaking.)

Needing an apartment in Sacramento and living currently in Indiana, he found some wonderful free tools on the internet that helped him judge the safety and desirability of his potential neighborhoods.  He shared them with me.

The first free internet tool is NeighborhoodScout.com.  This tool ranks neighborhoods into four shades of blue, with dark blue being the safest.

He used another tool called SpotCrime.com.  This tool describes each of the crimes committed in a neighborhood - shootings, assaults, robbery, thefts, vandalism, etc.  He actually chose to rent a different apartment based on what he discovered in SpotCrime.com.

A favorite underwriting tool of Blackburne & Sons is the free demographics site, City-Data.com.  Our commercial hard money lending company never makes a commercial loan without first obtaining a City-Data report on the area.  These reports include population, income levels, demographic trends (are people moving out), and the crime rate.

The most important internet tool of all, when you are ready to try to place your commercial loan, is the free website, C-Loans.com.  C-Loans is the largest of the commercial mortgage portals, and it enjoys 750 different participating commercial lenders. 

The user merely inputs his commercial real estate loan request and then chooses six of the suggested thirty commercial lenders.  If none of the first six commercial lenders wants to make his commercial real estate loan, the user merely comes back and checks the next six commercial lenders.  And best of all?  C-Loans.com is free!

 

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Topics: Commercial financing tools

Commercial Lending During the Second Great Depression

Posted by George Blackburne on Mon, Aug 8, 2011

The stock market is down another 600 points today, after being down more than 500 points last Thursday.  What will the future look like?

It's time to wake up, folks. The recession of 2007 to 2009 wasn't just a deep recession.  The approaching follow-up recession probably won't just be a double-dip of the same magnitude.  It will probably be much, much worse.  Historians may someday write that the Second Great Depression started in 2007, and, like the Great Depression that started in 1929, it consisted of at least three consecutive recessions.

Here's what you can expect:

The stock market will probably suffer a long, painful bear market that may last for more than a decade.  Japan's bear market has lasted for 22 years so far.  The Dow Jones Industrial Average may fall below 6,000.

Interest rates will probably stay low.  After all, a great many corporations and credit-worthy borrowers are too frightened now to borrow.  Prices of many goods and services will, by necessity, decline.  Yields on 30-year Treasury bonds may someday fall below 2.0%.  They aren't far off that number already.

Deflation, not inflation, will be the default trend.  Doubt this?  Oil has already dropped below $86 per barrel.  I wouldn't fall off my chair if oil dropped to less than $40 per barrel within a few years.  Remember, cars are becoming MUCH more fuel efficient, and it has been suggested that the world has already reached peak oil CONSUMPTION.  (Note: I did not say production.  I said consumption.)

Residential real estate is toast.  I expect home prices to fall another 40% to 50% from here.  Real wages are declining, and millions of qualified workers cannot find jobs.  Even worse, tens of millions of homeowners are drowning in mortgage debt, and they are upside down on their homes.  What incentive do they have to keep making their payments?

But what about commercial real estate?  Fully-leased commercial real estate will probably NOT plunge in value, if only because competing interest rates are so low.  As John Mauldin, the widely-read economics author, recently wrote, "I am am bullish on income."

That being said, however, the banks are already stuck with several trillion dollars in legacy commercial real estate loans.  They are under intense pressure from the regulators to get these troubled commercial mortgages off their books.  With commercial real estate values likely to deteriorate by at least 3% per year for the forseeable future, it is hard to see many banks making many new commercial real estate loans.

The only commercial lenders making commercial real estate loans for the next seven to ten years will probably be the private money (hard money) lenders.  Therefore, if you are a commercial property owner and you simply must borrow, you should steel yourself to paying 10% to 12% rates. 

If you are a commercial mortgage broker, you should find yourself a reliable hard money commercial lender, like Blackburne & Sons, and start rushing packages to them.  After today, those commercial loans that you had working at the bank are pretty much dead.

 

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Topics: Depression commercial loans

20 Best Commercial Lending Markets

Posted by George Blackburne on Sun, Aug 7, 2011

Bloomberg just came out with an interesting article listing the 20 healthiest major metropolitan areas in the country.  These metropolitan statistical areas (MSA's) had the lowest rates of unemployment, the highest job growth, and the least troubled housing markets.

Many of these markets included two or three large cities located close together that futurists now call mega-cities.  The presence of one or two large universities in these areas often serves as a floor to the level of economic activity. 

Some of the cities will surprise you, being located in the Rust Belt.  The reason why is because homes in these cities never really appreciated, like those of coastal cities, so the locals are not saddled with immense mortgage debt.

  1. Washington, D.C. - Arlington, VA - Alexandria, VA
  2. San Antonio, TX
  3. Rochester, NY  (Really?  Yup.)
  4. Pittsburgh, PA
  5. Omaha, NE - Council Bluffs, IA
  6. Oklahoma City, OK
  7. Nashville-Davidson-Murfeesboro-Franklin, TN
  8. McAllen-Edinburg-Mission, TX
  9. Madison, WI
  10. Little Rock, AR
  11. Knoxville, TN
  12. Jackson, MS
  13. Honolulu, HI
  14. El Paso, TX
  15. Dallas-Ft. Worth-Arlington, TX
  16. Columbus, OH
  17. Buffalo-Niagra Falls, NY
  18. Boston-Cambridge-Quincy, MA
  19. Austin-Round Rock, TX
  20. Augusta, GA

Anyone seeking a commercial mortgage located in one of these areas would be wise to point out the area's relative strength to their commercial lender.

 

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Topics: Best commercial lending area

Forbearance Agreements to Cut Off Lawsuits

Posted by George Blackburne on Wed, Aug 3, 2011

A smart commercial lender should arguably never foreclose on a commercial property without first entering into a forbearance agreement with his borrower.  I'll explain why in a second.

I just returned from Las Vegas, where I spoke at Leonard Rosen's 26th National Hard Money Lending Conference.  Leonard always brings in top attorneys to speak on how to become a hard money lender.  Even though I have personally owned a hard money lending company, Blackburne & Sons, for more than three decades, I find that I always learn important new things at these conferences.  The wise technique that I will now describe was suggested by one of Leonard's veteran attorney-speakers.

Suppose a commercial borrower falls behind in his payments.  He has personally guaranteed the commercial real estate loan, and his wife is terrified that they may soon lose the family home.  Husband and wife are losing sleep.

The borrower contacts his commercial lender and begs for help.  The unwise lender brushes him off and files a lawsuit to foreclose.  The borrower countersues!  He claims that the bank's loan officer promised to increase the borrower's loan from $1 million to $1.2 million.  The borrower, the lawsuit claims, detrimentally relied on the loan officer's promise, and he just spent $100,000 - the last of his cash reserves - ordering new raw materials for his widget-manufacturing business.

Now the bank has a problem.  The countersuit will drag out the foreclosure for at least another 2.5 years, during which time the building is being neglected.  After all, why should a borrower keep the building in good repair when he is poised to lose it in foreclosure?  The roof starts to leak.  The mold starts to grow ...

This was a huge mistake that could easily cost the bank hundreds of thousands of dollars, assuming the building does not have to be completely demolished after the bank completes the foreclosure.

Here is what the bank should have done:  The bank should have executed a Forbearance Agreement with the borrower, offering the borrower lower payments for, say, six months, in return for ... a waiver of all prior claims against the bank!

This would almost certainly have cut off any effective countersuit by the borrower and allowed the bank to complete its foreclosure, if necessary, without opposition.  What a terrific technique!

 

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Topics: forbearance agreement